1

Basics of Accounting

Lecture no. 7

dr Wojciech Hasik

[e-mail]

Objectives and Plan

Costs by function classification

Cost of manufacture & costs of sales

Accruals & deferrals

Profit on sales

2

Costs by function classification

by kind

by function

reclassification

Costs by function classification

3

Costs by function classification

Costs by function classification

Purpose of costs classification by function:

managerial information preparation

measuring cost of manufacture

proper matching of costs with relevant revenues
(deferrals & accruals)

4

Costs by function classification

Costs by kind:

statistical purpose classification

answers to: what kind of costs did we incurred?

are not matched with relevant revenues (formal
recognition)

Costs by function:

informative (managerial) purpose classification

answers to: where did we incur costs?

are matched with revenues (economic basis of
recognition – resulting in deferrals and accruals)

Objectives and Plan

Costs by function classification

Cost of manufacture & costs of sales

Accruals & deferrals

Profit on sales

5

Measuring cost of manufacture

Cost of product’s manufacture comprises direct costs of
product manufacture, as well as justified portion of indirect
costs of manufacture.
Direct costs represent the value of direct materials utilised in
process, obtaining and processing costs directly related to
production and other costs incurred in bringing the product
into the form and place as at the measurement date.
The justified portion of indirect costs, proportionate to the
manufacturing period, shall include indirect variable
production costs, as well as that portion of fixed indirect
production costs which corresponds to the level of such
costs under normal utilisation of production capacity.

.

Measuring cost of manufacture

Cost of product’s manufacture do not comprise:
a) general administrative costs,

b) products selling costs,

c) costs resulting from underutilisation of production
capacity,

d) products storage costs.

.

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Cost of manufacture & costs of sales

Costs of sales in P&LA

1.

Sales

2.

Costs of sales (cost of sold goods & services)

3.

Gross profit on sales

4.

Distribution costs (Selling costs)

5.

Administrative expenses (general & adm. costs)

6.

Profit on sales

7

Costs of sales

costs of sales

≠

selling costs

cost (value) of sold:

goods & services

cost of:

distribution,

salesmen wages,

selling facilities maintenance

etc.

Objectives and Plan

Costs by function classification

Cost of manufacture & costs of sales

Accruals & deferrals

Profit on sales

8

Accruals & deferrals

• the matching principle results in:

- reporting of accruals and deferrals:

capitalizing expenditures that will benefit future periods
(assets are recognized), expense against revenues as
benefits are realized (amortization),

capitalizing as liabilities revenues relating to future
periods

recognizing liabilities when efforts benefiting the
current period require cash payment in the future

Accruals & deferrals

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The basic principles in accounting

• the essence of matching principle

1.

which period activities

resulted in revenues?

+ revenues

- costs

= income

2.

which costs had to be

incurred so that

revenues could be

achieved?

Objectives and Plan

Costs by function classification

Cost of manufacture & costs of sales

Accruals & deferrals

Profit on sales

10

Measuring of profit on sales

In requires the proper matching of costs to relevant

revenues

revenues from sales

the value of assets sold

FINANCIAL RESULTS OF SALES (profit or loss)

Profit on sales reporting – polish
standard

A. Net revenues from sales of products, merchandise

and materials:

I. Net revenues from sales of products (finished goods)

II. Net revenues from sales of merchandise and materials

B. Costs of sold products, merchandise and materials:

I. Costs of manufacture of sold products (finished goods)

II. Value of merchandise and materials sold

C. Gross profit (loss) on sales (A-B)

D. Selling costs
E. General & administrative costs (overheads)

F. Profit (loss) on sales (C-D-E)

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Accounting for sales – an example

Inventories on stock:

merchandise (10 pcs @ 200PLN),

finished goods (70 pcs @ 20PLN),

materials (100 pcs @ 2PLN)

Inventories sold:

merchandise(5 pcs @ 300PLN),

finished goods(10 pcs @ 25PLN),

materials(5 pcs @ 5PLN)