Cost Of Goods Sold Formula In Perpetual Inventory System Accounting In Manufacturing And Trading Concerns

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Accounting In Manufacturing And Trading Concerns

A car manufacturer, for example, buys steel, rubber, aluminum, plastic, etc., which are used to make cars that are sold to dealers (commercial concern). These dealers, in turn, sell vehicles to consumers.

From an accounting point of view the activities of manufacturing and trading businesses are very similar, especially their management, marketing and financing activities. Therefore, many accounting principles and procedures can be applied to both manufacturing and commercial concerns. The main difference between the two is their method of costing and costing (1) inventory valuation and (2) cost of goods sold. The difference comes from the fact that trading businesses buy finished goods, while manufacturers make goods that are sold by retailers.

The cost of ‘goods inventory’ in a manufacturing industry is therefore the same as the ‘cost of goods purchased’ in a trading industry. In both cases these amounts represent the cost of finished goods available for sale. A commercial enterprise, having purchased its goods in ‘finished’ form, has little difficulty in ascertaining their value. A manufacturing business, on the other hand, must account for the costs of converting raw materials into finished goods (also known as manufacturing costs).

In converting raw materials into finished products, the manufacturer uses labor, machinery and equipment and incurs other manufacturing costs such as energy consumption, maintenance of machinery, etc. All these costs must be added to the cost of raw materials. determine the value of the material produced at any time.

Therefore, the accounting records of a manufacturing business must be expanded to provide for the recording of additional costs unique to manufacturers.

The three most important factors in manufacturing costs are materials, labor and manufacturing. In accounting terminology, material and labor costs are collectively known as primary costs, while accounting period conversion costs represent a combination of labor and general manufacturing costs.

Due to the nature of operations of a manufacturing business, it will require more general ledger accounts than a commercial business. The ledger should provide items such as machinery and equipment, inventory, raw materials, work in progress, finished goods, etc. It is necessary to pay special attention to the various inventory accounts.

At any given time, a manufacturer will have different types of inventory on hand: an inventory of materials ready to be used in the production process; partially finished products still in process; and finished goods to be shipped to retailers. Inventory inventory records and separate inventory accounts must be maintained to verify the cost of each type of inventory at the end of the fiscal period. All three inventory accounts are asset accounts and are usually maintained according to the perpetual accounting inventory system. At the same time they are administrative accounts supported by appropriate supporting records

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