Question

There are three "methods" to compute and work problems to calculate these figures. The first is simply by way of a formula...(i.e. beginning finished goods + cost of goods manufactured - ending finished goods = cost of goods sold). The second was by visualizing the flow of goods throughout the various T accounts for Raw Materials, Work in Process, and Finished Goods. The third was to prepare journal entries in order to compute each of these amounts, which is similar to the approach of the T-accounts, although perhaps arguably less visual.

For this discussion, I'd like you to tell me which method you prefer of the three discussed above to perform calculations for direct materials placed in production, cost of goods manufactured and cost of goods sold. For example, which is more intuitive and why? Instead, is there some combination of methods that makes more sense to you?

Answer 1

In order to decide which is the best method, we need to always consider the level and amount of Information we are given or have. Also we should consider the Entity for which Cost Data Analysis we are doing.

A. The Formula Method is the most easiest to apply when we have very less information and we are dealing with only finished goods. This method is most appropriate for a Trading Concern and not manufacturing one.

B. The T-Account Method is most optimum as it fits in all situation. It is most reliable and clear. One can easily understand the flow of Cost Data under this method. This method is more appropriate for Manufacturing Concerns when we have information relating to opening and closing raw material, WIP and Finished Goods.

C. The Journal Entries method applies the Dual Entry Accounitng System to record Cost Data. This method is least used method among all and most cumbersome.  

A mix of Formula Method and T-Account method may prove to be even more optimum in some situations.