• From: UAE
  • Registered: 08/14/2008
  • Posts: 82

Topic: Compatability between inventory valuation rep. and real value of stock

Actually during the testing one important consideration related to the principles the must be rectified by the developer .

First of all I did a test of one work order to produce 10 pcs from one code FG-01

FG-01 = 3 pcs of RM-01 and 2 pcs of RM-02

if we have the cost 1 pc of RM-01 = 2.14 and cost of 1 pc of RM-02 = 1.57

according to the FrontAccounting process the cost of stock item code FG-01 = 3x2.14 + 2x1.57 = 9.56$

and this is the problem here ....... why this I'll answer in the next few lines

in cost accounting the cost of manufacturing consists of three main category of costs
1- material cost
2- labour cost
3- other manufacturing costs ( overheads )

actually in FrontAccounting all those three category can be as issuing the material will be loaded to work order automatically and the other costs can be allocated directly also through bank payment of work order which we can pay the labour and the overheads
but what we expected as accountants to find all those costs ( labour costs and overheads ) to be loaded or allocated to the stock of finished goods , for example if we have a labour cost of 3.5 per pc and overheads 2 per pc this mean what we expected to be in the inventory valuation report is a value of 15.06 as a cost of manufacturing for FG-01 , but instead of this the inventory valuation report just include the material cost and ignore the other important costs which must allocated to the manufactured goods

the effect of this will make a very big problem when calculating the gross profit at the end of the period and in estimation of cost of goods sold and profitability for each item

in our case here if we are selling FG-01 in price of 20$ so according to the current process in FrontAccounting the cost of goods sold for one pc will be 9.56 and the gross profit will be in our case here 10.44 , in the accurate case the gross profit per pc must be 4.94 making a difference of 5.5

Pleas try to review the process of the other costs loaded to the work order to be counted to the inventory valuation report generated .

Abdelhamid M. Abdelhamid - Partner & Managing Director
Abdelhamid & Co Certified Public Accountants & Auditors - UAE - Sharjah
(ACPA & IACPA) - (International Arab Certified Public Accountant)- IASCA Fellow Member
Mobile "WhatsApp" : +971 50 7948028
  • joe
  • Administrator
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  • Registered: 03/15/2007
  • Posts: 5,107

Re: Compatability between inventory valuation rep. and real value of stock

Yes you are right. These costs have never been included in the finished goods. Thanks for finding this. Will be fixed asap.

/Joe

  • p2409
  • Senior Member
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  • From: Australia
  • Registered: 12/11/2008
  • Posts: 127

Re: Compatability between inventory valuation rep. and real value of stock

Actually Hameed your accounting interpretation of Gross Profit Margin is wrong.
It only includes costs directly attributable to producing a single additional unit - usually materials and often labour. In most systems, COGS accounts are flagged as such so this calculation is done correctly.

Overheads are NEVER included in gross profit margins.

Note to Joe/Janusz - it's appropriate to include any COGS expenses, but overheads like lighting, electricity etc. ie. anything not directly attributable to creating an additional single unit should not be included in a Gross profit margin reporting.

THe original poster might be mixing up Net Margin - this is never done at a product level, but across the business, and includes all expenses.


This site has good, international definitions of most accounting terms:
http://www.investopedia.com/

Pete

  • From: UAE
  • Registered: 08/14/2008
  • Posts: 82

Re: Compatability between inventory valuation rep. and real value of stock

Thank you for paying my attention for this , but you didn’t get the point that I referred to , what I meant here is the additional manufacturing costs or indirect costs must be allocated to the produced units because if you will not allocate those costs the cost of produced items will not be accurate and this will be reflected to the gross profit and as we studied the cost of production must be include direct labor and direct material and other manufacturing costs which is consists of indirect labor and indirect material and other manufacturing costs and this is what I referred to
So what I mentioned in the topic here is that we have to measure the cost of production in the best way and actually there are a lot of methods applied for this now a days like ABC , but in our case here we are talking about simple manufacturing procedures , so yes there are effects will be in gross profit if you will not measure your production costs in a proper way and if you will not allocate those indirect costs or other manufacturing cost to the work order .
Any way try to return back to any cost accounting reference and I’ll do the same and you are most welcome to discuss any accounting issues here , and if I’m right or wrong I’ll thank you .

Abdelhamid M. Abdelhamid - Partner & Managing Director
Abdelhamid & Co Certified Public Accountants & Auditors - UAE - Sharjah
(ACPA & IACPA) - (International Arab Certified Public Accountant)- IASCA Fellow Member
Mobile "WhatsApp" : +971 50 7948028
  • joe
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  • Registered: 03/15/2007
  • Posts: 5,107

Re: Compatability between inventory valuation rep. and real value of stock

This is a reply to infotechaccountants.
The overhead costs and labour cost is first allocated to the manufactured cost when producing the items. This is because before the production you cannot update the overhead and labour cost. If you in the between sell manufactured items not yet produced, it will influence the average labour and overhead costs on the items there today. This is the reason for not updating the stock average overhead and labour costs until the items are produced and ready for sale.

/Joe

  • p2409
  • Senior Member
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  • From: Australia
  • Registered: 12/11/2008
  • Posts: 127

Re: Compatability between inventory valuation rep. and real value of stock

Joe that is the correct accounting method - allocation of fixed costs are logically ONLY done at the end of reporting periods. Reporting on them during the reporting period is not done, because the results will vary widely from day to day as fixed cost invoices are paid eg. every quarter to lighting, electricity. A unit cost that includes ALL costs including overheads is an interesting year end measure, but doesn't make sense within the production cycle.

Hameed - when you talk about other overheads you want in the profit margins, shouldn't these overheads actually be variable costs and treated as such? That way, they could be included in your unit cost performance measure . An example of this would be if you are doing strict accrual accounting for all 'overheads' - then they notionally variable costs, and you would include them in cost of goods (note: incorporating fixed costs in unit costing is a tax office offence, at least in Australia for public companies - the reason being companies would get an excuse to record a tax-loss during the year, saving regular taxation payments until the end of the year and helping their cash flow!! Aren't people sneaky!)

http://www.investopedia.com/terms/c/cogs.asp (and some of the other definitions clearly explain what goes in product costing.

  • From: UAE
  • Registered: 08/14/2008
  • Posts: 82

Re: Compatability between inventory valuation rep. and real value of stock

I think there is some confusion here , to be accurate we have to call those costs other manufacturing costs not overheads or we can call it manufacturing overheads also , example of those costs , grease of machines that you are using in production stage or nuts or oil or any other expenses that will be allocated to the orders , the general overheads like cleaning expenses or office electricity expenses this is differ from the manufacturing overheads or other manufacturing costs which must be allocated to the particular orders , so what we talk about before is about the other manufacturing costs or manufacturing overheads not general overheads.

I hope that this will be clear now and actually I do respect investopedia website but this website is a definition website so if you need to refer to a reference you can refer to a cost accounting book .

Abdelhamid M. Abdelhamid - Partner & Managing Director
Abdelhamid & Co Certified Public Accountants & Auditors - UAE - Sharjah
(ACPA & IACPA) - (International Arab Certified Public Accountant)- IASCA Fellow Member
Mobile "WhatsApp" : +971 50 7948028