Question

Discussion on Formulas, T-Accounts, Journal Entries

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After reading Chapter 3 and reviewing the online videos, you should have a good understanding of the various approaches and tools necessary to compute and prepare schedules for direct materials placed in production, cost of goods manufactured, and cost of goods sold. The book exercises and the videos give you 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

According to me, the first method of using formula is the easiest and the simplest one. The formula goes like Cost of Goods Sold = beginning finished goods + cost of goods manufactured - ending finished goods.

It is easy to caluclate because - inventory that is sold appears in the income statement under the COGS account; The beginning inventory for the year is the inventory left over from the previous year—that is, the merchandise that was not sold in the previous year; Any additional productions or purchases made by a manufacturing or retail company are added to the beginning inventory. At the end of the year, the products that were not sold are subtracted from the sum of beginning inventory and additional purchases. The ending inventory is identified through the balance sheet of any firm under the "Current Assets- Invenotry" head. The beginning iinventory of current year is the closing inventory for the previous accounting year.

Service companies do not have COGS because it is merely the cost of inventory items sold during a given period. Not only do they have no goods to sell, but purely do not have inventories.