12
Liabilities
Liabilities are obligations of the entity that require future payment or the
rendering of services. Examples are accounts payable, taxes payable,
accrued expenses, unearned revenue, bonds payable, mortgages payable,
and leases payable. Liabilities may be of a current or noncurrent nature.
Noncurrent Liabilities
Noncurrent liabilities are sometimes used to finance noncurrent assets.
The expectation is that the return generated from the long-term asset will
be sufficient to meet the interest and principal payment of the debt. Long-
term liabilities include:
Bonds Payable. A bond is a written promise by the company to pay the
face amount at the maturity date. Periodic interest payments are required,
typically on a semiannual basis. Bonds are usually stated in $1,000
denominations. Debt financing has several advantages compared to equity
financing. Interest expense is tax deductible, whereas dividend payments
are not. During inflation, the debt is being paid back in cheaper dollars.
However, there are drawbacks to debt financing, including the risk of not
being able to meet the fixed interest charges and principal at maturity, and
restrictions placed on the company under the bond agreement such as
minimum working capital requirements.
Long-Term Notes Payable. When a note is issued, funds are obtained
from a specific lender rather than through the issuance of bonds payable
to the public at large.
Mortgage Payable. A mortgage has as its security the property financed.
It represents a lien on the property in case of default.
Leases. The lessee uses the property in return for periodic rental
payments to the lessor. In the case of a capital lease, the lessee shows as
a long-term liability the present value of future minimum rental payments
to be made. A capital lease is one in which one of the following four
criteria is met:
1. The lessee receives title to the property at the end of the lease term.
2. The lessee can acquire the property under a 'bargain purchase option.'
3. The life of the lease is 75 percent or more of the life of the property.
4. At the date of lease, the present value of the future minimum lease
payments equals or exceeds 90 percent of the fair market value of the
property.
If at least one of the criteria is not met, an operating lease is indicated.
This is accounted for as a regular rental.
Types of Bonds
A trustee such as a bank is selected by the company to safeguard the
creditors' interest. The agreement (indenture) between the trustee and
corporation spells out the particulars of the bond issue. The trustee may
hold collateral as security against default on the bonds. Collateral trust
bonds have as their collateral the firm's investments in other companies.
Sinking fund bonds require the company to make annual deposits with
the trustee. At maturity, the amount in the sinking fund (consisting of
principal and interest) should be sufficient to pay the face of the bonds.
Unsecured bonds (debentures) may be issued by credit-worthy
companies. For these, no collateral is required.
There are registered and coupon bonds. A registered bond has the
owner's name on the face of the bond and interest is paid directly to him
or her. A coupon bond does not indicate the owner's name and interest is
paid to the individual who presents a dated coupon.
Convertible bonds may be exchanged by the holder for other securities of
the company at a later date. Callable bonds may be reacquired at the
option of the issuing company prior to their maturity.
Serial bonds mature in installments rather than at a fixed maturity date.
Accounting for Bonds
When bonds are issued at their face value, the entry is to debit cash and
credit bonds payable. The entry to record the interest each period is to
debit interest expense and credit cash. Interest is equal to:
Face of bondxAnnual interest ratexPeriod between last interest date
The market price of a bond will most likely be different than its face
value (maturity value). A bond's market value depends upon a number of
factors, such as its interest rate, years left to maturity, and the financial
soundness of the company. For example, if a bond's interest rate is much
lower than the going interest rate in the marketplace, the market price of
the bond will be considerably lower than its face value.
The difference between the sales price of a bond and its face value is
recorded as Premium on Bonds Payable (when issue price exceeds face
value) or as Discount on Bonds Payable (when issue price is less than
face value).
The face value of a bond is stated as 100 percent. Therefore, a bond
issued at a premium would be sold at more than 100 percent. A bond
issued at a discount would be sold at less than 100 percent.
Premium on Bonds Payable
A bond would normally be sold at a premium if its face (nominal) interest
rate exceeds the current market rate for a comparable quality bond. The
premium should not be considered income but rather interest received in
advance that will serve to adjust the contract rate of interest. The
premium account is amortized over the life of the bond as a reduction of
interest expense. The entry is to debit premium on bonds payable and
credit interest expense. The true interest expense (net cost of borrowing)
for a given year is therefore the face interest less the adjustment for the
premium amortization.
In the balance sheet, the unamortized premium is added to the face value
of the bonds payable in order to derive the current carrying value (present
value) of the bond. At the maturity date, the carrying value of the bond
will equal its face value since the principal of the bond must be paid at
that time.
Discount on Bonds Payable
A bond would normally be sold at a discount when its face interest is
below the market interest rate. The discount is considered an incremental
interest expense, which is amortized over the life of the bond. The entry is
to debit interest expense and credit discount on bonds payable. The true
interest expense (net borrowing cost) for a given year is therefore the face
interest plus the discount amortization. In the balance sheet, the
unamortized discount is subtracted from bonds payable to arrive at the
current carrying value of the bond. Unamortized discount is a contra
account. At maturity, the unamortized discount account will be reduced to
zero and hence the carrying value of the bond will equal its face value.
Bonds Sold at Face Value Between Interest Dates
When bonds are sold between interest dates the purchaser must pay the
interest that has been accrued subsequent to the last interest payment date.
This is because at the next interest date the purchaser will receive the
interest for the full period. The net effect is that the purchaser will earn
the interest he or she is entitled to for the period he or she held the bond.
Bonds Sold at a Premium or Discount Between Interest Dates
When bonds are sold between interest dates at a premium or discount, the
entry to record the issuance reflects the accrued interest and the premium
or discount. Assuming a premium is involved, the entry is
Cash
Bonds Payable
Premium on Bonds Payable
Interest Expense
The premium or discount is amortized over a period between the
issuance date and the maturity date. The date of the bonds is not used in
determining the amortization period. The amortization per year is based
on the number of months that the bonds are outstanding.
Early Extinguishment of Bonds
Where a callable option exists, a company may redeem its bonds prior to
maturity. This may be the choice when the interest rate on the debt is
considerably higher than the current market interest rate. In this case, the
company will profit by issuing new bonds at a lower interest rate and use
the funds to reacquire the original, higher interest bonds. The call price is
usually a few points above face value.
Even if a call provision does not exist, the company may still retire its
bonds early by purchasing them in the open market.
Siegel, J. G. (1983). Financial accounting .
Current Liabilities
A liability is an obligation to convey assets or perform services at some
future date. For purposes of balance sheet analysis, it is important to
make a distinction between short-term or current liabilities and long-
term liabilities.
The Nature of Current Liabilities
Current liabilities include (1) those obligations which will require
payment from existing current assets and (2) all other obligations that are
to be paid from current assets within one year. Generally, current
liabilities arise from day-to-day business operations (i.e., Accounts
Payable, Salaries Payable, etc.). Others may result from the need for
short-term loans (i.e., Notes Payable) and still others from management-
created long-term obligations having a definite relationship to a short-
term period (i.e., current maturity values of long-term loans).
Proper recognition and accurate measurement of all current liabilities are
necessary in order to avoid overstatement of assets, long-term liabilities
or net income (i.e., the entire balance sheet equity section). Further,
current and long-term liabilities must be accurately distinguished so that
net working capital will be properly stated. Finally, the preparation of
meaningful cash budgets requires that a complete record of all current
liabilities be kept.
Valuation of Current Liabilities
Current liabilities (i.e., legal debts and obligations) are generally recorded
in the accounts and reported in financial statements at face value. In those
rare instances where exact amounts are not available, estimates are made
to determine the present value of a future outlay, using the discount
method described in APB Opinion No. 21, "Interest on Receivables and
Payables."
Four distinct categories can be identified with respect to the element of
uncertainty which affects the valuation of these future payments as
current liabilities: definitely determinable liabilities, liabilities arising
from operating results, estimated liabilities and contingent liabilities.
Definitely Determinable Liabilities
These liabilities generally originate from contracts or legal statutes which
fix the amount of the obligation and its due date rather precisely.
Therefore, the basic accounting problem is determining that the
obligation does in fact exist and that it is properly recorded.
Trade Accounts and Notes Payable. Procedures for handling the
recording and control of trade accounts and trade notes payable center
around purchase journals, voucher registers, accounts payable ledgers or
open invoice files, etc. Generally these records, or any combination of
them, will yield ample evidence as to the existence, amount and due date
of unpaid obligations. For statement purposes it is important that
particular attention be paid to transactions occurring near the end of one
accounting period and the beginning of the next so that the liability for
goods received is recorded in the same period as the merchandise is
included in inventory.
Loan Obligations. Items of this type include notes and loans payable and
any portion of long-term debt that will mature during the coming
operating cycle. However, if such portion of long-term debt will not
require the use of current funds (such as retirement through the operation
of a special-purpose sinking fund), the debt should be reported as
noncurrent with an appropriate note.
According to APB Opinion No. 21, if no interest is explicitly stated, or if
the rate of interest is unreasonably low, then interest must be imputed
(that is, it is understood to be included in the total). If adequate interest is
not included, the cost of the asset will be overstated and interest expense
understated. The APB opinion does not apply to payables or receivables
arising with suppliers or customers in the normal course of business
which are due on ordinary trade terms.
Dividends Payable. Dividend obligations are created only by action of a
company's board of directors. The declaration by the board represents a
legal obligation to pay the cash dividend in the amount specified at the
specified time. It always creates a current liability. Accumulated but
undeclared dividends on cumulative preferred stock create no liability;
however, the existence of such accumulated dividends in arrears should
be disclosed by footnote.
Accrued Liabilities. Unpaid obligations resulting from contractual
commitments (e.g., payrolls) or government legislation (e.g., taxes) are
referred to as accrued liabilities or accrued expenses. Taxes are generally
material in nature and are usually shown under a separate heading among
current liabilities. Some accruals (e.g., accrued interest) are often
combined with their respective liabilities, while most others are shown in
a combined form under a single heading. Some types of accruals require
special attention.
Liabilities Arising From Operating Results
Some liabilities cannot be measured until the results of operations are
known. In these cases, the basic accounting problem is estimating
appropriate amounts for interim monthly or quarterly statements.
Income Taxes. This liability applies only to corporate, estate and trust
income. Earnings from the operation of sole proprietorships and
partnerships are treated as personal income of the parties involved, and
generally require no disclosure of a liability.
When a corporate Federal income tax liability is expected to exceed a
specified amount, advance payment of that excess amount is required
according to established tax law schedules; nonpayment is subject to
penalty.
Any liability not covered by the advance payment is due at specified
dates in the following taxable year.
Estimated Liabilities
This category refers to liabilities which are indeterminate as to amount
and due date, but which exist and can be estimated with a reasonable
degree of accuracy as long as there is objective evidence on which to base
the amount of such obligation. Such liabilities may be either current or
long term. The two main groups of estimated liabilities are discussed
below.
Liabilities for Premiums and Other Customer Advances. Premium
coupons, tokens, tickets, certificates, etc. which entitle the holder to
merchandise, cash, or the performance of a service at some future time
are considered customer advances. Such obligations should appear as an
estimated liability on the balance sheet of the issuing company. As the
coupons are redeemed, a debit is made to the estimated liability account
with an offsetting credit to either a revenue account (if the redemption
value is greater than the cost of the item) or to a premium inventory
account (if the redemption value is equal to the cost of the item).
Actual claims are generally a small percentage of the total amount
available for redemption. At year end, therefore, the estimated liability for
premium claims and/or the estimated amount of forfeited claims must be
determined. Forfeited claims are easily calculated when a specified
expiration date occurs during the year. However, where claims must be
honored indefinitely, both estimates must be based on the company's past
experience. For example, if a company's records indicate that
redemptions average 40% of outstanding premium coupons, the estimated
liability account must be reduced with an offsetting credit to an income
account.
Liabilities Under Guarantees and Warranties. This liability group arises
from product sales (e.g., cars, televisions, etc.) or contracts (e.g., rentals
where the lessee must restore property to a specified condition on
termination). Although such liabilities may originate at the point of sale
or as contracts mature and premises are used, it is always necessary to
estimate the company's iability (and make periodic entries debiting an
expense account and crediting an account for the estimated liability), even
if the account amount must be adjusted once final performance costs are
determined.
For tax purposes, these estimates are deductible only when performance
costs have been incurred. However, tax considerations in this case should
be minimally considered in the preparation of periodic financial
statements, since to do otherwise might overstate income and understate
liabilities, particularly when such liabilities are material in amount.
Service contracts for major appliances covering specified time periods
constitute another aspect of this liability category. In this case, the price
of a service contract is treated as deferred revenue which is recorded on a
prorated basis over the contract's life. Estimates of periodic income
realized may be based on a company's past experience.
Contingent Liabilities
The term contingent liabilities refers to potential future obligations
which may or may not in fact materialize. It is thus distinguished from
estimated liabilities, which do exist but are uncertain as to amount, due
date and/or payee. Typical contingent liabilities include:
(1) Pending Lawsuits. Litigation against a company is carried as a
contingent liability until such time as the claim is actually settled (i.e.,
after all appeals, upon out-of-court agreement). Lawsuits pending as of
the balance sheet date are generally included as footnotes without
mentioning dollar values.
(2) Endorsements. When recourse is involved in discounting notes
receivable or assigning accounts receivable, the company endorses such
debts and may become liable in the event that the original debtor defaults.
(3) Income Taxes. In the event that the IRS fails to accept a company's
tax return as submitted and assesses additional taxes, a contingent
liability is created pursuant to an audit. Specific disclosure need be made;
frequently, however, a footnote noting IRS examination and final
determination of tax liability for certain years may be included. Except in
cases of fraud or failure to file a tax return, the statute of limitations
prevents the IRS from auditing returns more than three years old.
In reporting contingent liabilities, the sole objective is adequate
disclosure of such contingency and if determinable, the amount involved.
Disclosure in the financial statements may be made by (1) a parenthetical
comment following the item heading, (2) footnote, (3) inclusion of item
among liabilities without extending a dollar amount or (4) appropriation
of retained earnings.
Current Liabilities in the Balance Sheet
There are two considerations with respect to current liabilities in the
balance sheet:
(1) Listing Order. Current liabilities are generally listed according to
amount (largest to smallest), although they may be listed by due dates
when differences in maturity are significant. Liquidation priorities (i.e.,
taxes, wages, etc.) should be ignored in the interest of the going-concern
assumption.
(2) Detail of Disclosure. The kinds of headings used under Current
Liabilities will depend on the purpose of the balance sheet. The following
classification is generally acceptable:
Notes Payable to Banks Notes Payable to Trade Creditors Accounts
Payable to Trade Creditors Other Notes and Accounts Payable Estimated
Income Taxes Payable Other Accrued Liabilities Amounts Due to
Officers and Employees Other Current Liabilities Liabilities which will
be liquidated by the issuance of capital stock should be included under
stockholders' equity.
Cashin, J. A. (1989). Intermediate accounting .
A. Translate the following passage into Farsi.
Loss Contingencies
Formerly we discussed the contingent liability which arises when a
business discounts a note receivable to a bank. The business endorses the
note and hereby promises to pay the note if the maker fails to do so. The
contingent liability created by discounting the note is a potential liability
which will become a full-fledged liability or will be eliminated altogether
by a future event. Contingent liabilities are also called loss contingencies.
Loss contingencies, however, is a broader term, which includes the
possible impairment of assets. Assume, for example, that an American
company with operations overseas faces threats by a foreign country to
seize American-owned assets in that country. The possible loss is clearly
a potential impairment of assets rather than a contingent liability.
A loss contingency may be defined as a possible loss, stemming from
past events, that will be resolved as to existence and amount by some
future event. Central to the definition of a loss contingency is the element
of uncertainty-uncertainty as to the amount of loss and, on occasion,
uncertainty as to whether or not any loss actually has been incurred. A
common example of a loss contingency is the risk of loss from a lawsuit
pending against a company. The lawsuit is based on past events, but until
the suit is resolved, uncertainty exists as to the amount of the company's
liability.
13
Manufacturing Accounting
Manufacturing Accounts
A merchandising company provides services or buys and sells articles
without changing their form. A manufacturing company, by contrast,
converts raw materials into finished goods, in the process incurring labor
and overhead costs. Because of this difference in nature, a manufacturing
company requires additional asset and expense accounts. These may be
summarized as follows: Inventories. Instead of the single inventory
account used by a merchandising company, a manufacturing company
will need three separate inventory accounts: Raw Materials (or Direct
Materials), Work in Process, and Finished Goods.
Plant and equipment (fixed assets). The equipment used in
manufacturing is varied, numerous, and costly. Thus it is desirable to
maintain a subsidiary plant ledger in which the individual items are
recorded and to have a general ledger account, Plant and Equipment, to
control the subsidiary ledger.
Research and development costs. Success in manufacturing is usually
related to substantial research and introduction of new products.
Consequently, intangible assets, such as patents and the cost of research
and development, are shown on the financial statements of many
manufacturing companies.
Manufacturing or production cost. As described later on in Analysis of
Manufacturing Cost, manufacturing cost is made up of the cost of raw
materials, direct labor costs, and factory overhead. Each of these three
elements requires an account. If there are two or more products,
subsidiary records may be used to list the production costs by product.
For factory overhead a separate account is set up for each type of
expense, such as depreciation, repairs, or taxes.
Analysis of Manufacturing Cost
Each unit of finished goods includes the three elements of manufacturing
cost-raw materials (also known as direct materials), direct labor, and
factory overhead.
Raw Materials. This represents the cost of raw materials that become part
of the finished product. Purchases of raw materials go into inventory,
from which goods are issued and placed in production. The cost of raw
materials used is obtained by adding the beginning inventory to the
purchases for the period to arrive at the total raw materials available for
use. Of this amount, part is used during, and part is on hand at the end of,
the period. By taking a physical count at the end of the period the final
inventory can be determined; the balance is presumed to have been used.
The cost of raw materials is the invoice cost, plus transportation-in, less
any returns or allowances received from the vendor.
Direct Labor. This represents the amount of wages paid to factory
employees who work directly on the product; it is charged to Work in
Process. Included are the wages of machine operators, assemblers, and
others. The work of employees such as supervisors, janitors, and
timekeepers is indirect labor and their wages are included in factory
overhead.
Factory Overhead. This includes all factory costs other than raw materials
and direct labor. Each overhead item is recorded in an individual account,
but a single predetermined overhead rate is used in computing estimates
and bids for jobs and for recording costs. If actual cost exceeds estimated
cost, factory overhead is underapplied; otherwise it is overapplied. This
simplifying procedure enables management to determine the total cost of
a job as soon as the job is finished and to find out if the job resulted in a
profit or a loss.
Inventories
To calculate manufacturing cost and the cost of goods sold, it is generally
necessary to find the amount of inventory at the end of the period. This
amount is determined by (1) the unit cost, or manufacturing cost per item,
and (2) the number of units on hand.
Periodic Inventory Method. Under the periodic method the costs of
individual sales are not recorded, and to find the amount of the closing
inventory it is necessary to count and price the items on hand at the end
of the period. If units of a product were on hand at the beginning of the
period and additional units were produced during the period, the sum of
the two is the number of units available for sale during the period. Of this
number, some units were sold and some are still on hand. In most cases, it
is easier to count the items on hand at the end of the period and to apply a
cost using LIFO, FIFO, or some other costing basis. The amount so
obtained is then subtracted from the total goods available for sale to
derive the amount of Cost of Goods Sold.
The periodic inventory method, while much simpler than keeping track of
hundreds or thousands of receipts and issues throughout the period, also
has some disadvantages. It is time-consuming, and since it is applied only
at intervals, usually once a year, there are sometimes errors in counting,
pricing, or compiling the total.
Perpetual Inventory Method. Continuous individual records are usually
maintained to keep closer control of high-priced manufactured items or to
assure that a sufficient quantity of raw materials is on hand for
production. For expensive products, especially where there are not a great
many transactions, it is desirable to know at all times how many units
have been sold and how many are on hand-and also how many should be
on hand. In the case of automobiles or large appliances, each unit will
carry a serial number which appears on the purchase invoice. It is then a
simple matter to list from purchase invoices the serial numbers of those
units that were not sold and should be on hand. If any unit is missing, it is
usually easy to trace by serial number the receipt, shipment, or location of
the particular item.
Critical raw materials do not bear serial numbers. However, it is
necessary to keep perpetual records of receipts, issues, and quantity on
hand to prevent shortages which might halt production and be very costly.
•
Cost of Goods Manufactured
The cost of goods manufactured is the manufacturing cost (raw
materials+ direct labor+factory overhead) of the products finished during
the period. It is to be distinguished from total manufacturing cost, which
also includes work in process.
The balance of Cost of Goods Manufactured may be carried in the
manufacturing summary account, from which it is transferred to Expense
and Income Summary. To keep the income statement from becoming
overly long, a separate Statement of Cost of Goods Manufactured is
prepared. This statement expands upon the manufacturing summary,
providing the additional operating details required by management. Two
or more periods may be included on the statement to show the changes
from one period to another.
-
Income Statement
The income statement for a manufacturing company is similar to that for
a merchandising company, except for the terminology in the cost of
goods sold section. Below is shown a comparison of the terms.
Merchandising Company
Manufacturing Company
Beginning Inventory of Beginning Inventory of
Merchandise Finished Goods
+ +
Purchases of Merchandise Cost of Goods Manufactured
— —
Ending Inventory of Ending Inventory of
Merchandise Finished Goods
= =
Cost of Goods Sold Cost of Goods Sold
In most cases, the caption in the income statement for manufacturing
costs is shown as 'Cost of Goods Manufactured.' Thus, attention is
directed to the cost statement which supports the total figure shown in the
income statement.
Worksheet
As in nonmanufacturing companies, the financial statements can be
prepared more quickly and accurately if a work sheet is used. The form of
the work sheet for a manufacturing company is derived from the form for
a merchandising company by merely adding a pair of columns to provide
the data needed for the Statement of Cost of Goods Manufactured.
Joint Products and By-Products
Where two or more products are obtained from a common process, they
are usually referred to as joint products if all are of significant value. A
product is referred to as a by-product if it has limited value in relation to
the principal product. Generally a by-product is merely incidental to the
manufacture of the principal product.
Joint Products. Typical of joint products are gasoline, kerosene, and
naphtha, which are all obtained from the refining of crude oil. Generally,
one joint product cannot be produced without the others, and only the
total revenue of the entire group and the total production cost are relevant.
However, for inventory purposes it is necessary to make an allocation of
costs among the joint products. The usual method of allocating cost is on
the sales value of the various products.
Cashin. J. A. (1989). Accounting II .
Cost Systems
A cost system is a method of accumulating and assigning costs. It is
essential that a manufacturing company know quickly the cost of making
a product, performing a factory operation, or carrying out any other
activity of the business. Decisions of the highest importance depend on
the accuracy of the cost data. For example, an understatement in the cost
of producing an automobile would result in a lower selling price than
warranted and cause losses of perhaps millions of dollars. Trading and
service companies, as well, have developed cost systems for their
operations.
A good cost system also provides a means of cost control. Thus,
management can compare cost data with budgets and standards to
effectively plan and control all business activities.
Job Order Cost System
Under this system the cost of raw materials, direct labor, and factory
overhead are accumulated according to the particular job order or lot
number. To arrive at the average unit cost the total cost is divided by the
number of completed units.
Generally, the job order cost system is most suitable where the product is
made to individual customer's specifications and where the price quoted
is closely tied to the cost (for instance, cost plus 15%).
Process Cost System
Under this system, the costs are accumulated according to each
department or process for a given time period. Thus the average unit
departmental cost for a day, week, month, or year is arrived at by dividing
the total departmental cost by the number of units (or tons, gallons, etc.)
produced in the particular period.
The process cost system is used by manufacturers of goods such as paper
and steel, which are produced in large volumes on a continuous basis.
Supplementary Costing Practices
Either of the following two procedures can be used in conjunction with
the job order system or with the process cost system.
Standard Costs. A large number of manufacturers determine
representative costs ahead of time and use them to predict actual costs.
Special variance accounts are provided to pinpoint the discrepancies
between standard and actual. Standard costs and the related subject of
budgets are discussed later on.
Direct (Variable) Costing. Under this procedure, only costs which
increase in direct proportion to the volume produced become part of the
cost of the product. Thus, raw materials costs, direct labor cost, and some
items of which do not change with the quantity produced, are excluded.
Direct costing brings the cost of goods sold into closer relation with the
sales for the period. When full costs-that is, variable plus fixed costs-are
used, the average cost per unit goes down as more units are produced.
This might suggest higher profits than is the case; actually, a larger
portion of the fixed costs is now included in the inventory cost.
Flow of Goods: Equivalent Units
Usually the products for which process costing is employed will have a
number of different production operations performed on them. Thus, the
goods pass from one department to another and the costs applied to date
are maintained in the cost records. Now, usually, not all the work begun
during the period will be finished at the end of the period: there will be an
ending inventory of units in various stages of completion. Likewise, there
will be an opening inventory of units only partially completed during the
previous period. This more general situation is described by the flow
equation.
Units Available During Period = Units Disposed of During
Period
opening inventory+units put into units transferred to next
dept.
production + ending inventory
When any three terms in the flow equation are known, the missing piece
of data can be computed from the equation itself.
Flow of Costs
With all inventories and production reduced to equivalent units, we can
calculate unit costs for use in conjunction with FIFO, LIFO, weighted
average, or some other inventory costing method. It should be
emphasized that the number of equivalent units involved is determined
solely by the manufacturing process and is quite independent of the
choice of costing method.
Different costs would be obtained under LIFO or weighted average. If
LIFO is used, the 5.500 units transferred would be assumed to consist of
the 5,000 units put into production during the month and 500 units from
the opening inventory.
In the weighted average method, the cost of the opening inventory and the
cost of goods put into production would be added, and the sum ($29,500)
divided by the equivalent units of production (5,100). This would provide
the unit cost, which would be applied to both the goods transferred and
the ending inventory.
Cashin, J. A. (1989). Accounting II .
A. Translate the following passage into Farsi.
Cost Accounting Systems
How much does it cost Apple Computer to manufacture each Macintosh?
If ou are a manager at Apple Computer, you need this information. You
need it to set selling prices, you need it to determine the cost of goods
sold, and you need it to evaluate the efficiency of the company's
manufacturing operations.
A cost accounting system consists of the techniques, forms, and
accounting records used to develop timely information about the cost of
manufacturing specific products and of performing specific functions.
Because cost accounting systems are most widely used in manufacturing
companies, the focus will be upon the use of these systems to determine
the cost of manufactured products. However, the concepts of cost
accounting are applicable to a wide range of business situations. For
example, banks, accounting firms, and governmental agencies all use cost
accounting systems to determine the cost of performing various service
functions.
In a manufacturing company, cost accounting serves two important
managerial objectives: (1) to determine the per-unit cost of each
manufactured product, and (2) to provide management with information
that will be useful in planning future business operations and in
controlling costs. Unit costs are determined by relating manufacturing
costs-the costs of direct materials used, direct labor, and manufacturing
overhead-to the number of units manufactured.
A 'unit' of product is defined differently in different industries. We tend to
think of 'units' as individual physical products, such as automobiles or
television sets. In other industries, however, the number of units
manufactured may be stated as a number of tons, gallons, barrels, pounds,
board-feet, or other appropriate unit of measure.
Unit costs provide the basis for inventory valuation and measurement of
the cost of goods sold. They also provide managers with information
useful in setting selling prices, deciding what products to manufacture,
and evaluating the efficiency of operations.
The phrase controlling costs refers to keeping costs down to reasonable
levels. When a cost accounting system provides timely information about
unit costs, managers are able to react quickly should costs begin to rise to
nacceptable levels. By comparing current unit costs with budgets, past
performance, and other yardsticks, managers are able to identify those
areas in which corrective actions are most needed.