Question

Distinguish between the main components of the income statement for a manufacturing company which makes clothing and a retail company that only buys and sells clothing.

A manufacturing company makes the products that it sells. Briefly identify and define the cost elements that are incurred in making a product. After product cost elements are identified, how is the cost of goods manufactured for a period determined?

Answer 1

Solution 1:

The difference in main component of income statement for a manufacturing company which makes clothing and a retail company that only buys and sell cothing is that:

In retail company Cost of goods sold is represented by = Opening Stock + Purchased - Closing Stock

While in manufacturing company income statment component include Opening stock of raw material, ending stock of raw material, raw material purchases, raw material consumed, direct labor incurred on production, Manufacturing overhead incurred, opening WIP, closing WIP, Cost of goods produced, Opening stock of finished goods, closing stock of finished goods.

In manufacturing concern first cost of goods produced shown as = Raw material consumed + Direct labor + Manufacturing overhead + Opening WIP - Closing WIP

Where raw material consumed = Opening stock + Purchase of raw material - Closing stock of raw material

Then cost of goods sold is presented as = Opening stock of finished goods + Cost of goods produced - Closing stock finished goods.

Solution 2:

The cost element incurred in makina product primarly are raw material, direct labor, variable manufacturing overhead (e.g. Fuel, electricity etc), fixed manufacturing overhead (e.g. Supervisor salary, factory rent, depreciation of machine etc).

Cost of goods manufactured for a period is determined as under:

Raw material consumed + Direct labor + variable manufacturing overhead + Fixed manufacturing overhead + Opening WIP - Closing WIP

Where raw material consumed = Opening stock + Purchase of raw material - Closing stock of raw material