Costing process starts with raw materials input and ends with finding cost of sales ( see figure 1.1)
Raw materials consumption
Cost of production
Opening Stock of finished goods
Closing Stock of finished goods
Cost of goods sold
Selling & distribution overhead
Amortised potion of R&D overhead
Cost of sales
Let us take an example
A factory purchased 100000 units of raw materials @ $10. It incurs wages $6,75,000 and factory overheads $3,00,000. its stock option position is as follows:
|Opening stock||Closing stock|
Administrative overheads $ 2,50,000
Selling & Distribution overheads $ 1,00,000
Find out cost of sales per unit.
Follow FIFO for valuation of raw material stock and average cost for W-i-P and finished goods.
|Less closing stock||5,000||50,000|
|Add Factory overheads||3,00,000|
|Add opening WIP||2,000||30,000|
|Less Closing WIP||(1,000)||(19,733)|
|Add opening stock of finished goods||1,000||18,000|
|Less closing stock of finished goods||(1,500)||(29,573)|
|Cost of goods sold||99,500||>||19,61,694|
|Add Admn. overheads||2,50,000|
|Add S&D Overheads||1,00,000|
Cost of Sales
Cost of sales per unit is $23.23
Notes: Valuation of closing stock
1. Closing stock of raw materials
By FIFO assumption items used first are issued first. So closing stock is valued @$10 which is the latest purchase price.
2. Closing Stock of WIP
This is valued on average basis.
Total units including opening WIP 1,01,000
Total cost including value of opening WIP ($19,63,000 + $30,000) = $ 19,93,000
Cost of WIP 1000 units = 19,93,000/1,01,000*1000 = $ 19,733
3. Closing stock of finished goods on average cost basis.
Total units including opening cost 1,01,000
Total Cost including value of opening stock $ 19,91,267
Cost of finished goods = 19,91,267/1,01,000*1500 = $ 29,573
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