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COST OF GOODS SOLD STATEMENT AND VALUATION OF STOCK

In manufacturing concern, separate books are maintained to keep the record of every single work done in manufacturing process to ascertain cost incurred on production of goods. This record gives information about total cost incurred on manufacturing process and per unit cost of goods manufactured. When goods are produced, these are sold to the customers of the business and goods unsold are taken into stock. At the end of the financial year, manufacturing concern prepares a statement which gives the brief summary of the whole process.

This statement shows the value of raw material consumed, amount spent on labor and other factory expenses, finished goods produced and goods unsold (in stock). Such statement is called ‘cost of goods sold statement’. Manufacturing concerns, while presenting financial statements, also present cost of goods sold statement.

Standard format of cost of goods sold statement is given below:

Raw Material:	O/S Raw Material + Purchases + Cost Incurred to Purchase RM - C/S Raw Material Cost of Material Consumed
Conversion Cost:	+ Direct Labor Cost + Factory Overheads Total Factory Cost
Work in Process	+ O/S of WIP - C/S of WIP Cost of Goods Manufactured
Finished Goods	+ O/S of Finished Goods - C/S of Finished Goods Cost of Good Sold

Cost of material consumed – is the cost of material used for consumption that has been put in the production process. This head shows the raw material left unused from the previous year(opening stock), raw material purchased in the current year, expenses incurred in bringing the purchased material into the business premises and raw material that is not used in the current year (closing stock).

Over Heads Costs----are the other costs incurred in relation of manufacturing of goods.
Examples are factory utilities, supervisor salaries, equipment repairs etc.

Total factory cost – is the cost of material consumed plus labor and over heads. In other words it is the total cost incurred in the factory.

Cost of goods manufactured – is total factory cost plus opening stock of work in process less closing stock of work in process.

Cost of goods sold – is the cost of goods manufactured plus opening stock of finished goods less closing stock of finished goods.

Prime/Basic Cost = Cost of Direct Material Consumed + Direct Labor cost

Conversion cost it is the cost incurred to convert raw material to finished goods.

Conversion cost = Labor cost + factory overhead

Example
Using the following data calculate the Cost of Goods Sold of XYZ Co.

Stock levels	O/S Rs.	C/S Rs.
Raw material	100,000	85,000
Work in process	90,000	95,000
Finished goods	150,000	140,000

• Purchase of raw material during the period Rs. 200,000
• Paid to labor Rs. 180,000 out of which Rs. 150,000 used on production.
• Other production costs Rs. 50,000

Solution

XYZ Co. Cost of Goods Sols Statement For the period ended-------
Raw Material:	Opening Stock Raw Material + Purchases + Cost Incurred to Purchase RM - Closing Stock Raw Material Cost of Material Consumed	100,000 200,000 (85,000)	215,000
Conversion Cost	+ Labor Cost +Factory overhead 50,000	150,000 50,000
Total Factory Costs
Work in process	+ O/S of WIP - C/S of WIP		90000 (95000)
Cost of Goods Manufactured
Finished Goods	+ O/S of Finished Goods - C/S of Finished Goods		150,000 (140,000)
Cost of Goods Sold			420,000

Illustration

Following information of Ahmad & Company is given. Prepare a cost of goods sold statement.

Stock levels	O/S Rs.	C/S Rs.
Raw material	150,000	115,000
Work in process	50,000	55,000
Finished goods	120,000	100,000

• Purchase of raw material during the period Rs. 100,000
• Transportation charges of items purchased Rs. 5,000
• Paid to labor Rs. 100,000.
• Other production costs(FOH) Rs. 80,000

Solution

Raw Material:	Opening Stock Raw Material	150,000
	+ Purchases	100,000
	+ Cost Incurred to Purchase RM	5,000
	- Closing Stock Raw Material	(115,000)
	Cost of Material Consumed	140,000
Conversion Cost:	+ Labor	100,000
	+ Factory Overheads	80,000
	Total Factory Cost	320,000
Work in Process:	+ O/S of WIP	50,000
	- C/S of WIP	(55,000)
	Cost of Goods Manufactured	315,000
Finished Goods:	+ O/S of Finished Goods	120,000
	- C/S of Finished Goods	(100,000)
	Cost of Good Sold	335,000

Stock Card

Stock card is used to keep the record of what has come in stock and what has gone out of it. Standard format of stock card is given below:

Stock Account Item 01
Date	Receipts	Qty	Rate	Amount	Date	Issues	Qty	Rate	Amount

Stock card has two parts:
• Receipt side
• Issue side

Both sides have similar columns that include:
• Nature of item to be kept in stock
• Quantity of items
• Rate at which it was purchased
• Total value of items

Receipt side is used to record data of items coming in the stock and issue side is used to record information of goods issued for manufacturing process.

Valuation of Stock

Any manufacturing organization purchases different material through out the year. The prices of purchases may be different due to inflationary conditions of the economy. The question is, what item should be issued first & what item should be issued later for manufacturing. For this purpose, the organization has to make a policy for issue of stock. All the issues for manufacturing and valuation of stock are recorded according to the policy of the organization. Mostly these three methods are used for the valuation of stock:
Methods of Stock valuation
• First in first out (FIFO)
• Last in first out (LIFO)
• Weighted average

First in first out (FIFO)
The FIFO method is based on the assumption that the first merchandise purchased is the first
merchandised issued. The FIFO uses actual purchase cost. Thus, if merchandise has been purchased at
several different costs, the inventory (stock) will have several different cost prices. The cost of goods sold
for a given sales transaction may involve several different cost prices.

Characteristics

• This is widely used method for determining values of cost of goods sold and closing stock.
• In the FIFO method, oldest available purchase costs are transferred to cost of goods sold. That means the cost if goods sold has a lower value and the profitability of the organization becomes higher.
• As the current stock is valued at recent most prices, the current assets of the company have the latest assessed values.

Last in first out (LIFO)

As the name suggests, the LIFO method is based on the assumption that the recently purchased merchandise is issued first. The LIFO uses actual purchase cost. Thus, if merchandise has been purchased at several different costs, the inventory (stock) will have several different cost prices. The cost of goods sold for a given sales transaction may involve several different cost prices.

Characteristics

• This is alternatively used method for determining values of cost of goods sold and closing stock.
• In the LIFO method recent available purchase costs are transferred to cost of goods sold. That means the cost of goods sold has a higher value and the profitability of the organization becomes lower.
• As the current stock is valued at oldest prices, the current assets of the company have the oldest assessed values.

Weighted average method

When weighted average method is in use, the average cost of all units in inventory, is computed after every purchase. This average cost is computed by dividing the total cost of goods available for sale by the number of units in inventory. Under the average cost assumption, all items in inventory are assigned the same per unit cost. Hence, it does not matter which units are sold; the cost of goods sold is always based on current average unit cost.

Characteristics

• Under the average cost assumption, all items in inventory are assigned same per unit cost (the average cost). Hence it does not matter which units are sold first. The cost of goods sold is always on the current average unit cost.
• Since all inventories are assigned same cost, this method does not make any effect on the profitability and does not increase/decrease any asset in the financial statements.
• This is the alternatively used method for determining values of cost of goods sold and closing stock.

Example
Receipts:

• 01 Jan 20--, 10 units @ Rs. 150 per unit
• 02 Jan 20--, 15 units @ Rs. 200 per unit
• 10 Jan 20--, 20 units @ Rs. 210 per unit

Issues:

• 05 Jan 20--, 05 units
• 06 Jan 20--, 10 units
• 15 Jan 20--, 15

FIFO Method of Stock Valuation

Date	Receipts	Issues	Value of Stock
01-01-20-	10 @ Rs. 150 =1,500		10 x 150 = 1500
02-01-20--	15 @ Rs. 200 = 3,000		10 x 150 = 1500 15 x 200 = 3000 4500
05-01-20--		5 @ 150 = 750 750	5 x 150 = 750 15 x 200 = 3000 3750
06-01-20--		5 @ 150 = 750 5 @ 200 = 1000 1750	0 x 150 = 0 10 x 200 = 2000 2000
10-01-20--	20 @ Rs. 210=4200		10 x 200 = 2000 20 x 210 = 4200 6200
15-01-20--		10 @ 200 = 2000 5 @ 210 = 1050 3050	0 x 200 = 0 15 x 210 = 3150 3150

Weighted Average Method of Stock Valuation

Date	Receipts	Issues	Value of Stock	Average Cost
01-01-20-	10x150 = 1500		1500	1500/10=150
02-01-20--	15x200 = 3000		1500 + 3000 = 4500	4500/25=180
05-01-20--		5x180 = 900	4500 – 900 = 3600	3600/20=180
06-01-20--		10x180 = 1800	3600 – 1800 = 1800	1800/10=180
10-01-20--	20x210 = 4200		1800 + 4200 = 6000	6000/30=200
15-01-20--		15x200 = 3000	6000 – 3000 = 3000	3000/15=200

Effects of valuation method on profit

FIFO Method

• Cost of Sales = 750 + 1750 + 3050 = 5,550
  Gross Profit = 7500 – 5550 = 1,950

Weighted Average Method

• Cost of Sales = 900 + 1800 + 3000 = 5,700
  Gross Profit = 7500 – 5700 = 1,300

NOTE: Rs. 7,500 is assumed value.

Illustration

Hamid & company is a manufacturing concern. Following is the receipts & issues record for the month of May, 2002

Date	Receipts	Issues
May 7	200 units @ Rs. 50/unit
May 9		60 units
May 13	150 units @ Rs. 75/unit
May 18	100 units @ Rs. 60/unit
May 22		150 units
May 24		100 units
May 27	100 units @ Rs. 50/unit
May 30		200 units

Calculate the value of closing stock by

• FIFO Method
• Average Method

Solution

Valuation of Stock by FIFO Method

Date	Receipts	Issues	Value of Stock	Total Amount	Remaining No. of units	Net Balance
May 7	200 units @ Rs. 50/unit		200 x 50 = 10,000	10,000	200	10,000
May 9		60 units @ Rs. 50/unit	60 x 50 = 3,000	(3,000)	140	7,000
May 13	150 units @ Rs. 75/unit		75 x 150 = 11,250	11,250	290	18,250
May 18	100 units @ Rs. 60/unit		60 x 100 = 6,000	6,000	390	24,250
May 22		140 units @ Rs. 50/unit 10 units @ Rs. 75/unit	50 x 140 = 7,000 10 x 75 = 750	(7,750)	240	16,500
May 24		100 units @ Rs. 75/unit	75 x 100 =7,500	(7,500)	140	9,000
May 27	100 units @ Rs. 50/unit		50 x 100 = 5,000	5,000	240	14,000
May 30		40 units @ Rs. 75/unit 100 units @ Rs. 60/unit 60 units @ Rs. 50/unit	75 x 40 = 3,000 60 x 100 = 6,000 50 x 60 = 3,000	(12,000)	40	2,000

Valuation of Stock by Weighted Average Method:

Date	Receipts	Issues	Value of Stock	Total Amount(Rs.)	Total Units	Average Cost(Rs.)/unit	Net Balance (Rs.)
May 7	200 units @ Rs. 50/unit		200 x 50 = 10,000	10,000	200	50	10,000
May 9		60 units	60 x 50 = 3,000	(3,000)	140		7,000
May 13	150 units @ Rs. 75/unit		75 x 150 = 11,250	7,000+11250 = 18250	140+150 = 290	18250/290 = 62.9	18,250
May 18	100 units @ Rs. 60/unit		60 x 100 = 6,000	18250+6000 = 24250	290+100 = 390	24250/390 = 62.2	24,250
May 22		150 units	150 x 62.2 = 9330	(9,330)	390-150 = 240		14,920
May 24		100 units	100 x 62.2 = 6220	(6,220)	240-100 = 140		8,700
May 27	100 units @ Rs. 50/unit		100 x 50 = 5,000	8,700+5,000 = 13,700	140+100 = 240	13700/240 = 57.1	13,700
May 30		200 units	200 x 57.1 = 11,420	(11,420)	240-200 = 40		2,280

Related Content: MGT101 - VU Lectures, Handouts, PPT Slides, Assignments, Quizzes, Papers & Books of Financial Accounting

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