It might include items such as costs of research, photocopying, and production of presentations and reports. In a services business, the cost of sales is more likely to be wages, salaries and personnel costs for staff delivering the service, or perhaps subcontracting costs. This might include direct material and labor costs, product costs, purchase returns and allowances, purchase discounts, freight inwards (that is the costs of bringing the product to your place of manufacture or distribution warehouse), and direct labor costs and factory production overhead. They do not include selling expenses, distribution costs, marketing etc such costs are termed costs of selling or selling costs or sales and marketing costs.įor a manufacturing, retailing or distribution business the cost of the goods sold refers to the physical product and the costs of bringing it to the point of sale. The costs included in COGS are those necessary to bring the product to its present state and condition prior to sale. The items must have been sold otherwise there is no cost of goods sold.ĬOGS can equally refer to a service as well as a physical product hence the uses of the more general term Cost of sales. If sales are made on cash (2).The cost of goods sold sometimes abbreviated to COGS or referred to as Cost of Sales, is the costs associated with producing the goods which have been sold during an accounting period. Sales and the transfer of cost from finished goods to cost of goods sold account are recorded by making the following journal entries: (1). In such circumstances, the manufacturing cost per unit is computed and the cost of the units that have been shipped to customers is charged to cost of goods sold account. But in some cases, the complete job is not shipped but only a portion of the job is sold to customers. If a job is completed according to specification of a particular customer, the complete job is shipped to the customer immediately and the manufacturing cost associated with the job (as shown by the job cost sheet) is charged to the cost of goods sold. When finished goods are shipped to customers, the cost of finished goods are transferred from finished goods account to cost of goods sold account. Next period, this cost represents the opening balance of the work in process account. The total cost transferred from the work in process account to the finished goods account during a period is equal to the cost of goods manufactured for that period.Īt the end of a period, the cost of incomplete jobs remain in the work in process account and is shown as “work in process inventory” in assets section of the balance sheet. The following journal entry is made to transfer the cost of a completed job from work in process account to finished goods account: When a job is completed, its cost (as shown by job cost sheet) is transferred from the work in process account to the finished goods account.Īfter completion, the job becomes finished goods and is, therefore, transferred from the production department to the finished goods storeroom (also called warehouse). In a job order costing system, all manufacturing costs (i.e., direct materials, direct labor, and applied manufacturing overhead) of the job are debited to work in process account. Recording finished goods and cost of goods manufactured:
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