Revenue

Definition The amount a business earns by selling goods or providing services is called revenue. Explanation The remuneration of goods sold or services provided is called revenue. It includes both cash received for goods sold and services rendered and accounts receivable for goods sold and services rendered on credit. Revenues appear in trial balance are …

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Explanation and treatment of direct expenses

All direct expenses are recorded on the debit side of Trading Account. The detailed explanation of some direct expenses is as under: Opening stock or opening inventory The opening stock consisted of different types of finished goods in case of trading business. Whereas in case of manufacturing business opening stock consisted of raw materials, work-in-progress …

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Cost accounting formulas

The following formulas can be used to find out different costs. Prime cost = Direct material consumed + Direct labour Conversion Cost = Direct material + Factory overhead Factory cost = Direct material + Direct labour + Factory overhead Cost of Goods Manufactured = Direct material consumed + Direct labour + Factory overhead + Opening …

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What is a manufacturing business?

Explanation In the previous few articles, we have seen how traders prepare their set of final accounts. Their Trading Account discloses their gross profit, which is simply the excess of sales over cost of goods sold in the year. Calculating the cost of goods sold by a trader in a particular year is fairly simple …

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Total cost of manufacturing

The total cost of manufacturing a product has three elements, namely: Raw material used (or Direct material cost) Direct labour (or Direct wages) Production overhead (or Factory overhead, or Works overheads) A manufacturing business maintains a separate raw materials purchases account for each type of raw material used by its factory. Similarly, it maintains separate …

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Direct and indirect materials cost

Definition and Explanation Direct material cost A direct material is any commodity that enters into and becomes a constituent element of a product. Thus cotton is a direct material for textile goods, leather for shoes, wood (or steel or plastic) for furniture, etc. Some products have more than one direct material, e.g. biscuits are made …

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Direct and indirect labor cost

What is Labour? Labor represents cost of services of human resources. labour is the most mobile factor of production. Labour is divided into two types: Direct labour Indirect labour Direct labour Direct labour is the effort of such persons who are directly involved in the production of a good. For example. in a small carpentry, …

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Prime Cost

What is Prime Cost? – Definition Prime Cost is the aggregate of direct material cost, direct labor cost and direct expenses. It is also known as ‘Flat Cost’, ‘First Cost’ or ‘Direct Cost’. The total of a product’s direct costs is called the prime cost. Once the cost of raw materials used in a particular …

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Factory Overheads

Definition of Factory Overheads Factory Overheads may be defined as the aggregate of indirect materials, labour and other costs which cannot conveniently be identified with the articles produced or services rendered.  The benefits of these cannot be identified with a particular cost unit. Instead, they are apportioned among cost units on an equitable basis. Overheads constitute …

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Production cost

Definition and explanation Production cost, or Factory cost, or Cost of goods manufactured, is the sum of Prime cost and Production overheads. The calculation of this figure is shown in a special ledger account called Manufacturing Account. The figures disclosed in the Trial Balance of a manufacturing concern, relating to raw material, direct labour and …

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Difference between trading and manufacturing concern

The difference between Trading and Manufacturing concern can be explained with the help of following points: Nature of purchase Trading Concern: These business institutions purchase merchandise in ready shape to sale condition, for example, furniture dealer purchase furniture from the manufacturer and sell it to customers without additional processing. Manufacturing Concern: Manufacturing institutions employ labour and machinery …

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Stocks of a manufacturing concern

A manufacturing business would have, at the beginning and end of each financial year, the following stocks: Raw Materials Accounted for when calculating the cost of raw material used in Manufacturing Statement. Finished Goods These are goods ready for sale, accounted for in trading account when calculating cost of goods sold. Work in Progress These …

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Work in process

Definition and explanation At the end of any financial period there are certain goods in every manufacturing concern that have been partially processed so that they cannot be called raw material anymore. But at the same time they are not fully processed and cannot be called finished goods either. Such goods are called Work in …

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Valuation of work in progress

Definition and explanation Due to its peculiar nature, the valuation of work in progress should include the cost of raw material used thus far as well as the cost of direct labour and production expenses used to bring the material into the state of work in progress. The methods of actual valuation of work in …

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Trading account of a manufacturing company

In the Trading Account of a manufacturing company, the Production Cost figure (as calculated by drawing up the Manufacturing Statement) should be used in the place of “Purchases” figure. Opening stock of finished goods should be added to Production Cost (or Cost of Goods Manufactured) to arrive at the value of goods available for sale. From …

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How to prepare income statement for a manufacturing company

Introduction The income statement for merchandising and manufacturing companies differs primarily in the reporting of the cost of the merchandise (goods) available for sale and sold during the period. In this lecture, we will learn how to prepare the income statement for a manufacturing company. In a manufacturing company, there is a need to prepare …

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