Topic 1: Introduction to financial accounting

Accounting is the process of identifying, measuring and communicating

economic information to allow informed decisions by the users of that
information.
The basic purpose of financial accounting is to produce useful information
which is used in many and varied ways. People use the information generated
by financial accounting to improve their decision-making in allocating scarce
resources
The users of financial statements do not all have the same information needs.
They are all different people, with differing objectives so they are likely to
need different information:

User
Bankers
Managers
ASIC
Sharehold
ers
Suppliers
ATO
Trade
unions

Type of information
Likelihood of company meeting its interest payment on time
Profitability of each division of company
Financial position and performance issuing shares to public for 1 st
time
Prospects for future dividend payments
Probability that company will be able to pay for its purchases on
time
Profitability of company based on taxation laws
Profitability of company since last contract with employees was
signed

The simplest method of accounting is to record cash when it is received or

paid; this system is termed cash accounting. Alternatively, under an
accrual accounting system, transactions are recorded in the period in which
they occur; not when the cash is received or paid.
It is important to understand the basic assumptions underlying current
accounting practices and the preparation of financial statements:
Accounting entity financial activities of the biz are separate from the
owners
Accounting period the life of the biz is divided into discrete equal time
periods for the purpose of measuring performance
Monetary transactions are measured using a common denominator i.e.
$AUS
Going concern financial statements are prepared with the assumption
that the entity will continue operations in the foreseeable future
Materiality items w/ a small dollar value are expensed rather than
recorded as an asset
Accrual basis financial reports are prepared on the accrual basis of
accounting
Historical cost assets are initially recorded at cost, however throughout
time their value may change. Thus it is important to note at what
valuation assets are being recorded

Topic 2: Measuring and evaluating financial position and performance

The balance sheet lists at a particular point

in time, all the account balances for assets
(resources), liabilities (obligations) and
owners equity of an organization informs
us about the financial position of the
enterprise in terms of financial structure and
strength
The heading of the statement includes the
name of the company and date at which
statement is drawn up i.e.
Sound and Light Pty Ltd.
Balance sheet as at 30 March 2011
A = L + OE assets have been financed using liabilities and equity the
owners have invested in company
The income statement summarises how well the enterprise is performing
and how it achieved this profit/loss

summarises transactions over a

specific period of time
Heading of statement includes
name of company and period for
which statement is drawn i.e.
Sound and Light Pty Ltd
Income statement for period ended
30
March 2011
Revenue are increases in the
companys wealth arising from the
provision of services or sales of
goods
Expenses are decreases in the
companys wealth that are incurred in order to earn revenue
The link between the income statement and balance sheet is through
retained profits (accumulation of all profits that are not distributed to

shareholders) it is the account in the balance sheet that provides the link as
shown:
Retained profits, beginning of period:
5000
Add: net profit(loss) for period: 2000
Less: dividends declared during
period: (1000)
Retained profits, end of period: 6000

Topic 3: The double-entry system

Transactions are events that affect the operations or finances of an

organisations
Transaction analysis involves examination of each business transaction
with the aim of understanding its effect on the accounting equation. i.e.

Each double-entry record names one (or more) accounts that are debited, and
one (or more) that are credited. Accounts contain all the transaction record
and any adjustments, and therefore reflect everything recorded in the
system.

The double-entry records are called journal entries journal entries can list
as many accounts as are needed to record the transaction, but for each
journal entry, the sum of the debits must equal the sum of the credits as
shown:

Topic 4: Record-keeping

The accounting cycle represents the sequence of accounting procedures from

the original documentary evidence of a transaction to the preparation of
financial statements:
1) SOURCE DOCUMENTS verify that a transaction has occurred and provide
details of the transaction i.e. sales invoice, cheque butt, receiving reports
2) PREPARE JOURNAL ENTRIES prepared based on the details provided by
source documents. A journal entry is an analysis of the effects of the
transactions on the accounts; identifying debit and credit effects
3) POST TO LEDGERS process of transferring the amounts from the journals
to appropriate accounts in the ledger. Ledgers have separate records for
each individual account. These ledgers are then balanced by ensuring
their accounts add up to the same amount.
4) PREPARE A TRIAL BALANCE trial balances are a listing of all the general
ledger accounts with their balances. The balances are listed in the debit or
credit column and must equal. The purpose of this is to prove that debits
= credits and therefore the double-entry bookkeeping has occurred
correctly.
5) PREPARE ADJUSTING JOURNAL ENTRIES adjusting entries are the final
key process, before computing final ledger balances, of assigning the
financial effects of transactions to the appropriate time periods. These

journals are necessary to adjust the revenue and expense accounts to

reflect:

Expenses incurred but not yet

paid
Payment received prior to
revenue being earned

Revenues earned but not yet

received
Prepayment of expenses and
their expiration

6) PREPARE AN ADJUSTED TRIAL BALANCE this trial balance is taken out

after all end-of-period accruals, corrections and other adjustments to
ensure that debits still equals credits. This listing also provides a
convenient summary of the balances of all accounts as a basis for
preparation of closing entries
7) PREPARE CLOSING ENTRIES closing entries formally transfer the
balances of revenue and expenses to the p/l summary account. It is then
closed to the retained profit account. In this way, these accounts then
have a zero balance to begin the next period. These accounts are
temporary as they accumulate transactions for the period covered by the
income statement and are then reset to zero to accumulate sales for the
next period
8) PREPARE POST-CLOSING TRIAL BALANCE final trial balance taken out
after closing entries are completed. This balance, therefore, only includes
balance sheet accounts because income statement accounts have been
closed to retained profit
9) PREPARE FINANCIAL STATEMENTS p/l summary account used in step 7
can be used to prepare the income statement and the post-closing trial
balance can be used to prepare the balance sheet
Topic 5: Revenue and expense recognition in accrual accounting

Accrual accounting is the dominant form of financial accounting in the world

today. It recognises revenues and expenses; regardless of when cash is
collected
Its purpose is to extend the measurement of financial performance and
position by recognizing events before and after cash flows, as well as at the
point of cash flows.

Example
Recognition of revenue
or expense at same
time as cash inflow or
outflow
Recognition of revenue
or expense prior to cash
flow

Journal entry
Retail shop records a cash sale of $48 to a customer:
cash and sales revenue:
DR Cash
48
CR Sales
48
Lawyer performs services for a client in June 2009 and
bills client $500 to be paid within 30 days: Accounts
receivable and Fee revenue:
DR Accounts receivable
500
CR Fee revenue
500

Recognition of revenue
and expense after cash
flow

Cash collections or
payments related to
previously recognised
revenues and expenses
Cash inflow or outflow
before revenue and
expense recognition

Dogwood recognises a portion of the cost of the

building as an operating expense: Depreciation
expense and Accumulated depreciation:
DR Depreciation expense
4000
CR Accumulated
4000
depreciation
Lawyer receives full payment from her client in July
2009: Cash and Accounts receivable:
DR Cash
500
CR Accounts receivable
500
Lawyer receives an advance of $2500 from a client for
future services. The revenue will not be earned until a
later date when services are performed. Recognition of
revenue is deferred until the service has been
performed: Cash and Customer deposits:
DR Cash
2500
CR Customer deposits
2500

Adjusting journal entries assign the financial effects of transactions to the

appropriate time periods adjusting entries are made when financial
statements are about to be prepared, this ensures all relevant information is
included to provide useful information for decision-making.
There are four main types of routine adjustments that need to be accounted
for:
1. EXPIRATION OF ASSETS prepaid expenses arise because the payment
schedule for an expense does not match the companys financial period
i.e. insurance premiums is paid one year in advance.

The initial journal entry to record the payment would

be at some time during the year:
At the end of the period, the part of the expense
relating to the current financial year would be
transferred to expenses:

DR Prepaid Insurance
CR Cash
DR Insurance expense
CR Prepaid
insurance

2. UNEARNED REVENUES arise where cash has been received prior to the
earning of revenue. Unearned revenue is recorded as a liability until such
time as the work is performed and the revenue earned i.e. a publisher
receives subscription revenue prior to the production of the magazine.
Initial journal entry to record the cash
receipt:
Each month when magazine is published
and sent, revenue is recognised

DR Cash
CR Unearned subscription
revenue
DR Unearned subscription revenue
CR Revenue

3. ACCRUAL OF UNRECORDED EXPENSES it is essential that at the end of

each period the biz checks that all expenses have been recorded
regardless of whether payment has been made i.e. date of wage
payments rarely coincide w/ period end. The wages owing for work
performed but not yet paid needs to be accrued.
The entry for this portion of wage is:

DR Wage expense
CR Wages accrued

4. ACCRUAL OF UNRECORDED REVENUES occurs when a service has been

provided but cash will not be received until the following i.e. interest is
earned on bank deposits on a daily basis but paid annually; interest
earned for financial period needs to be brought to account
DR Unearned revenue
CR Revenue

Contra accounts: accounts established to accumulate certain deductions

from an asset, liability or owners equity item (usually assets) i.e.
Accounts receivable allowance for doubtful debts: when a company sells
to a customer on account; there will always be some risk that the
customer will fail to pay. Therefore, a portion of the sales on account will
be doubtful and should be deducted from revenue.

Scenario
Company determines that a portion of
sales on account are not likely to be
paid
Company decides to write off account
after being notified portion cannot be
collected

Journal entry
DR Bad debts expense
CR Allowance for doubtful debts
DR Allowance for doubtful debts
CR Accounts receivable

Equipment accumulated depreciation:

Asset costs $100,000 with a life of

DR depreciation expense
$20,000
CR
Accumulated
$20,000
5 years. Straight line depreciation
depreciation
each year
After 3 years, book value is $100,000 ($60,000) = $40,000

Accumulated amotisation: allocation of the cost of a non-current asset to

expense over the life of an asset to recognise the consumption of the assets
value

Topic 6: Special journals, subsidiary ledgers and control accounts

A worksheet is used to help prepare financial statements; it lists all the

accounts vertically down the page starting with assets, liabilities, equity,
revenue and expenses.
Worksheets have 10 columns, or 5 sets of 2 columns each set has a debit
and credit column.
Previously, we entered all transactions into the general journal and posted
individually to the general ledger most common transactions undertaken by
biz can be recorded in special journals which allow for some classification and
summarization to occur in the journal
In special journals, each entry represents a transaction that belongs to the
same class as others in the same
journal.
These special journals are used in
addition to a general journal
transactions that are not recorded
in a special journal are recorded in
the general journal (i.e.
depreciation, adjustments for
prepayments and other accrual)
An advantage of special journals is that amounts are posted to general ledger
as totals rather than as individual journal entries
Subsidiary ledgers are a set of ledger accounts that collectively represent a
detailed analysis of one general ledger account i.e. debtors
Relevant general ledger accounts are called a control account periodic
reconciliation of subsidiary ledger to control account is needed.
Examples of general ledger accounts that have subsidiary ledgers are debtors
/ accounts receivable (separate account for each debtor) and equipment
separate record for each piece of equipment

Topic 7: Internal control and bank reconciliation

Internal control is defined as all the policies and procedures that are used
by management to ensure effective and efficient operations as well as the
reliability of financial reporting in compliance with laws and regulations
Internal control systems consist of all measures employed by an entity to:
Promote accuracy and reliability of accounting data
Encourage compliance with management policies and government
regulation
Safeguard its resources against waste, fraud and inefficiency
Five components of internal control systems:
1. Control activities policies & procedures ensuring management directives
are carried out
2. Risk assessment identify and analyze risk; to determine how risk should
be managed
3. Information and communication information collected and effectively
communicated to enable people to carry out their responsibilities
4. Monitoring ongoing monitoring and separate evaluation to assess
quality of performance
5. Control Environment provides discipline and structure which sets tone
for organization
Features of an effective internal control system include:
Competent employees
Adequate insurance
Clearly established lines of
Adequate pay and motivation for
responsibility
employees
Maintenance of effective records
Employees take regular leave
Cash is the most liquid asset and cannot be specifically identified as
belonging to one particular person (anonymous) so it is hard to control
therefore cash requires strong internal control
Petty cash is a fund set up to make small cash payments, especially those
that are impractical or uneconomical to make by cheque i.e. miscellaneous
office needs
Petty cash funds are created by cashing a cheque drawn on the companys
regular cheque account. The cash is then kept in a petty cash box and is
controlled by an authorized individual.
Payments from petty cash must be accompanied by a petty cash voucher as
well as the third-party receipt, where possible.
The fund is replenished when the amount of cash becomes low. Journal
entries are required for the set-up of the fund, and each time it is replenished,
to record the expenses incurred
Bank reconciliations are used as additional internal control by comparing
the bank statement with the cash account in the general ledger
The main reason that the bank statement and bank account per the ledger
will not agree is due to timing differences including:

Items in the companys accounts

that have not yet been recorded on
the bank statement including
deposits in transit and unpresented
cheques
Items included on the bank
statement that have not yet been
entered in the companys records,
including non-sufficient funds cheques, bank fees, amounts received
directly into bank account, interested collected by bank and interest
earned on the account
Errors made by either the bank or the company

Topic 8: Introduction to inventory, non-current assets and contra

accounts

There are two methods of recording and controlling inventory:

1. Perpetual controls inventory by maintaining continuous records on the
flow of units of inventory more costly, but provides better control as
stock losses are easily determinable
2. Periodic calculates inventory by using data on beginning inventory,
additions to inventory and an end-of-period count to deduce the COGS

Three major types of cost flow assumptions:

1. First-in First-out method (FIFO) assumes that the first units
purchased are the first units sold. Ending inventory therefore is assumed
to consist of the most recently acquired units
2. Last-in First-out method (LIFO) assumes the opposite of FIFO, saying
that any inventory on hand consists of the oldest units
3. Weighted Average method (WAM) weighted average cost is
calculated, then applied to the number of units sold & number of units in
ending inventory assumes ending inventory and COGS are composed of
both new and old units.
In times of rising purchasing prices:
FIFO results in the highest ending inventory, lowest COGS and highest
gross / net profit

LIFO results in lowest ending inventory, highest COGS and lowest gross /
net profit
WAM results fall between FIFO and LIFO
Property, plant and equipment are tangible items that are held for use in
production, rental to others or for administrative purposes expected to be
used during more than one period
The basic premise is that assets will be valued and recorded on the balance
sheet at its initial historical cost. The cost of an asset includes those required
to make asset suitable for its purpose
Depreciation is the systematic allocation of the depreciable amount of an
asset over its useful life, not valuation. Property, plant and equipment usually
have limited useful lives.

There are three main methods of calculating depreciation of assets:

1. Straight-line depreciation
This method is used if decline in value is expected to be uniform across
the life of asset (same depreciation expense each year)

Residual value is the estimated amount that an entity would obtain

from the disposal of the asset at the end of its useful life.
Useful life is the period of time over which an asset is expected to be
available for use

2. Reducing balance depreciation

Assumes that the benefits are used more in the earlier years of the life
of the asset

3. Units of production depreciation

This method if the most common activity-based method of
apportioning costs

Activity-based depreciation methods provide a more theoretically

correct approach for reflecting the expected pattern of consumption
over the economic life of the asset
However, it is not feasible to apply activity-based depreciation methods
to all assets

The method used to calculate depreciation should reflect the use of the
assets economic benefit
Depreciation method should be reviewed periodically. If there has been a
significant change in expected consumption of economic benefits, method
should be changed to reflect this

Topic 9: Contents of annual reports in Australia, introduction to cash

flow statements, auditors reports, corporate governance

A phrase often used in relation to accountings conceptual structure is

generally accepted accounting principles (GAAP) they are rules, standards
and usual practices that companies are expected to follow when preparing
their financial statements.
There are four principal qualitative characteristics of financial reports:
1. Understandability: users are expected to have a reasonable knowledge
of business, economic activities and accounting to study the information
with reasonable diligence. However, recently there has been issues
claiming that accounting has become so complex even experts have
trouble understanding a published set of financial reports.
2. Relevance: information should assist users to make, confirm or correct
predictions about past, present or future outcomes. The relevance of
information is affected by both its nature and magnitude.
3. Reliability: financial reports must be faithfully represented so that it
portrays its purpose, have substance over form so that transactions are in

accordance with their economic reality. They must also be neutral; free
from bias, complete; information is not omitted
4. Comparability: period-to-period and company-to-company
Assets are resources controlled by the entity as a result of past transactions
and from which future economic benefits are expected to flow to the entity.
Characteristics include:
i.
Future economic benefits: potential to contribute to future cash flow
through its use
ii.
Control by entity not limited to legal ownership
iii.
Occurrence of past transactions are usually by purchase or production
Assets should be recognised only when:
It is probable that its associated future economic benefits will flow to the
entity
Item has a cost or value that can be measured with reliability
Liabilities are present obligations arising from past events, the settlements
of what are expected to result in an outflow from the entity of resources
embodying economic benefits. Essential characteristics of liabilities include:
i.
Existence of a present obligation
ii.
The obligation involves settlement in the future via the sacrifice of
service potential or future economic benefits
Liabilities should only be recognised when:
It is probable that the future sacrifice of economic benefits will be required
The amount of the liability can be measured reliably
Equity is defined as the residual interest in the assets of the entity after
deduction of its liabilities. Accordingly, the concepts of assets & liabilities
must be first defined.
Understand the implications of accounting policy
Discuss situations requiring judgments and ethical decisions

Topic 10: Basic ratio analysis

The purpose of financial statement analysis is to use the financial statements

to evaluate an enterprises financial performance and position.
The validity of financial analysis based on accounting ratios has been
challenged and critisied that future plans and expected results, not historical
numbers should be used in computing performance ratios. Also, ratios are
meaningless on their own; they need to be benchmarked against results from
prior years or against other companies in the same industry
Types of ratios:
1. Performance ratios aim to give the financial statement user some
indication of the companys record of generating profits and its potential
for generating profits in the future. Some performance ratios include:

RETURN ON
EQUITY

Returnon equity=

Indicates how much return the company is generating on

the historically accumulated shareholders investment
Owners are interested in expressing the profits of the firm
as a rate of return on the amount of shareholders equity

RETURN ON
ASSETS

Returnon assets=

PROFIT
MARGIN

Gross profit
Salesrevenue

Provides an indication of the companys product pricing and

product mix.

Operating profit a fter tax

Sales revenue

Indicates the percentage of sales revenue that ends up as

profit, so it is the average profit on each dollar of sales

Gross margin=

EARNINGS
PER SHARE

Earningsbefore interest tax

Total assets

Describes the rate of return earned on the assets available

Profit margin=

GROSS
MARGIN

Operating profit after tax

Shareholde s ' equity

Net operating profitdividends on preferred shares

Weighted average number of ordinary shares outstanding
EPS relates earnings attributable to ordinary shares to the
number of ordinary shares issued.

2. Activity (turnover) ratios aim to give the financial statement users

some indication of the companys operations in certain areas. These
include:
TOTAL ASSET
TURNOVER

Assets turnover=

INVENTORY
TURNOVER

Sales
Total assets

Reflects a companys ability to use its assets to generate

sales indication of operating efficiency

Inventory turnover=

Measures the number of times inventory is sold or used

during the period indication of the efficiency of inventory
management

Daysinventory =

DEBTORS
TURNOVER

COGS
Averageinventory

365
Inventory turnover

Measure of how long, in days, inventory is held on average

Debtors turnover=

Credit sales
Average trade debtors

This ratio indicates the efficiency of the company to collect

the amount due from debtors

Daysdebtors=

365
Debtors turnover

Debtors turnover can be divided into 365 days in order to

calculate the average number of days to collect accounts
receivable.
If it is too high, it indicates a problem with the granting of
credit
If it is too low, it indicates that credit granting policies are
too strict and sales are being lost

3. Liquidity ratios aim at giving the financial statement user some

indication of the companys ability to pay its short-term debts as they fall
due, includes:
CURRENT
RATIO

Current ratio=

This ratio measures the ability of the company to pay its

current debts as they become due
If the ratio is small, it may indicate a problem in paying
short-term debts
If it is too high, it may indicate that the company may not
be efficiently be using its current assets

QUICK RATIO

Current assets
Current liabilities

Cash+ Receivables+ Shortterm investment

Cur rent liabilities
Generally similar to current ratio, just remove inventory
from numerator
Particularly useful for companies that cannot easily convert
inventory into cash quickly if necessary

4. Financial structure ratios measure the ability of the company to

continue operations in the long-term. Ratios may include:
DEBT-TOEQUITY RATIO

Debtequity ratio=

Total liabilities
Total shareholder s ' equity

Measure of the proportion of the companys borrowing to

owners investment may indicate policy regarding
financing of its assets
Greater than 1 means assets are mostly financed with debt
Too high ratio is a warning about risk

DEBT-TOASSETS
RATIO

Debtassets ratio=

LEVERAGE
RATIO

Indicates the proportion of assets finance by liabilities

The greater the ratio, the greater risk will be associated with
the firms operations

Leverageratio=

Tot alliabilities
Total assets

Total a ssets
Total shareholde r ' sequity

Measures how much the companys assets are finance by

equity
The higher the ratio, the more the companys assets are
funded by equity

Topic 11: Introduction to management accounting and cost concepts

There are four main functions that managers are expected to perform:
1. Planning: formulating short- and long-term plans
2. Organising: assigning tasks and allocating resources
3. Leading: directing, motivating and implementing plans
4. Controlling: comparing actual and planned performance
Management accounting refers to the processes and techniques that focus
on the effective and efficient use of organisational resources to support
managers in their tasks of enhancing both customer and shareholder value.
Customer value is the value customers place on particular features of a
product whereas shareholder value is the value that shareholders or owners
place on the business. However, there is a trade-off between customer and
shareholder value
Management accounting systems are info systems that produce
information required by managers to manage resources and create value.
Although management accounting systems may not be able to provide all the
information to satisfy managers decision-making needs, it provides
information for planning and controlling operations, measuring performance
and estimates of the costs of producing goods and services.

Context
Prior to 1950s

1950-1965

From mid1980s

Evolution of management accounting

Focus on cost-accounting, primarily for inventory valuation
and financial control, and the emphasis was on the
management accountant as a scorekeeper for management.
The term management accounting began to be used, and
referred to the provision of information to management for
planning and control it now included investment appraisal,
decision analysis and responsibility accounting as well as the
established techniques of budgeting and planning and control
Focus moved to waste reduction, and techniques involving
process analysis and cost-management techniques were


From mid1990s

21st century

adopted.
With the emergence of new IT processes and waste-reduction
management, accounting often became team-oriented
Focus shifted towards broader techniques of resource
management, and focused on the creation of customer and
shareholder value through the effective use of resources
The domain of MA started to become a dimension of the
management process with a broad range of managers such
as marketing managers and engineers becoming more
involved in the production & analysis of management
accounting information
MA has not abandoned the concepts of cost-accounting and
financial control, nor the provision of information for planning
& control, rather these objectives now form part of the
broader function of resource management.
Management accounting still involves many techniques
developed in past decades, such as budgets and basic
product-costing principles, however they are now
supplemented by modern techniques that better assist
managers in value creation.

Performance measures
Performance measure systems may involve managers in the HRM area

The major differences between financial and management accounting

include:

Info users
Regulatio
ns

Data
sources

Nature of
info

Management accounting
Internal: managers and
employees at all levels
No accounting standards or
external rules are imposed.
Info is generated to satisfy
managers info needs

Both financial & non-financial

data drawn from many sources
core accounting system,
physical & operational data,
market, customer and
economic data
Historic, current and futureoriented; subjective, relevant,

Financial accounting
External: shareholders, creditors,
banks, trade unions, govt bodies
Accountants must comply w/ Aus
accounting standards and
incorporated bodies must comply
w/ applicable accounting
standards and requirements of
the Corporations Act 2001
Financial data almost exclusively
drawn from the organizations
core transaction-based
accounting system

Historic; objective; auditable;

reliable; not-timely; not always

timely; supplied at various

levels of detail to suit
managers specific needs

In manufacturing organisations, costs are subdivided into two major

functional categories:

Manufactur
ing costs
(productio
n)

Nonmanufactur
ing costs
(selling
and
administrat
ion)

relevant; highly aggregated

Direct manufacturing costs are those directly traceable to the

product being manufactured
In single-product firms, all manufacturing costs are direct
In a multiple-product firm, there are two types of direct
manufacturing costs: cost of raw materials and cost of labour
needed to convert raw materials into finished product (direct
labour)
All other costs associated w/ manufacturing process are
indirect costs
Indirect costs are lumped into 1 category manufacturing
overhead
This category contains a wide variety of items including all
factory-related indirect costs i.e. depreciation on plant &
equipment, supplies, supervision, electricity and indirect
labour
There are two categories of non-manufacturing costs: selling
costs and administrative costs
Selling costs are those costs necessary to market and
distribute a product or service often referred to as ordergetting and order-filling costs i.e. employee salaries,
advertising, warehousing, shipping
All costs associated with the general administration of the
organisation that cannot be reasonably assigned to either
marketing or manufacturing are administrative costs
General administration is responsible for ensuring that the
various activities of the organisation are properly integrated so
that the overall objective of the firm is realised i.e. topexecutive salaries, legal fees, general accounting and research
/ development

Cost of goods manufactured represents the total COGS completed during

the current period.
The only costs assigned to goods completed are the manufacturing costs of:
1. Direct materials costs: costs of raw materials that are directly traceable
to the product i.e. steel in motor vehicle, wood in furniture, alcohol in beer

2. Direct labour costs: cost of labour used to convert raw materials into a
finished product i.e. wages for employees who assemble, package or sew
3. Manufacturing overheads: costs that cannot be economically and
conveniently associated with a particular cost object i.e. depreciation,
maintenance supplies, supervision
Details of this cost assignment are given in a supporting schedule known as
the statement of cost of goods manufactured.