Cost of sales and Inventories Flashcards
What is an inventory made up of?
Goods purchased and held for resale
Finished goods
Work in progress
Raw materials
Cost of sales =
Opening inventories + purchases + carriage inwards - closing inventories
What is carriage inwards/ outwards?
Inwards - delivery costs from supplier to us
Outwards - delivery cost to send to customer, treated as an expense
What can be included in cost of sales?
Direct labour costs
Sales commission
Materials used
Double entry for closing inventories
Dr inventories Cr cost of sales
Double entry to reverse opening inventories
Dr cost of sales Cr inventories (opening amounts)
Double entry for transferring to cost of sales
Dr cost of sales Cr purchases/ opening inventories from initial trial balance
How do companies count inventories?
Do a stock count at year end, or use continuous stock counts if they have large amounts of stock
How are inventories valued?
They must be the lower of historic cost and net realisable value.
What is the historic cost?
The cost to purchase/ cost to manufacture goods.
Includes purchase price, delivery, import taxes and duties, conversion costs
What is net realisable value?
The expected selling price - direct costs before sale.
Direct costs are cost to complete, modification costs, selling and distribution expenses
What are some costing methods?
FIFO and AVCO
first in first out and average cost
What is the profit when prices are rising?
FIFO profit > AVCO profit
FIFO closing inv > AVCO closing inv
What is the profit when prices are falling?
FIFO profit < AVCO profit
FIFO closing inv < AVCO closing inv
How to calculate a margin?
sales = 100%, cost of sales = (100-x)%
sales price = (100unit cost)/(100-x)
unit cost = (sales price(100-x))/100
