Key Points of Cost Calculation in Indonesian Accounting Operations

The material and processing costs incurred on the shop floor are expenses for the current month. The cost incurred to produce the manufactured products is the manufacturing cost, and the cost incurred to produce the sold products is the cost of goods sold (COGS). Selling and administrative expenses incurred for sales are deducted from the gross profit.

Key Points When Conducting Accounting Operations Hearings in Indonesia

I work on implementing business systems in Indonesia. The diverse Indonesian staff, skilled in production management, accounting, and programming, have different ways of grasping the essence of the same problem. While the essence of things is singular, the way of verbalizing it changes based on the "key points" for understanding, and the method of grasping the essence varies by person. It is fascinating to learn that others' understanding of the essence may differ from one's own.

Unlike those engaged in practical corporate accounting in the finance department, I am involved with accounting in the unique context of accounting system implementation. The practical accounting discussions I hear from clients are abstracted into the global definition of "accounting as the rearrangement of numbers within the rules of trial balance equations."

This equation proves that the profit, which is the difference between expenses and revenue in the profit and loss method, becomes the increment of net assets in the property method, forming the foundation of my accounting knowledge. Without this understanding, explaining COGS and period costs is impossible.

Transferring the Three Accounts of Beginning Inventory, Current Month Purchases, and Ending Inventory to the COGS Account

Recording purchases as expenses means not managing assets in accounting during the month, so it is necessary to transfer the beginning and ending inventory at the end of the month to synchronize inventory and accounting. Without this, a B/S cannot be created.

The relative accounts (contra accounts) during this inventory transfer, Opening Stock (expense) and Closing Stock (negative expense), correspond to P/L items.

While the final gross profit can be confirmed from the trial balance amounts, it is necessary to specify the gross profit (gross margin) on the P/L.

To record this, it is necessary to hold the ending inventory and transfer part of the total expenses to COGS by subtracting the beginning inventory and current month manufacturing cost.

This means setting the balances of the three accounts, Opening Stock, Closing Stock, and Current Month Purchases, to zero and making the difference the balance of the COGS account.

Case: In the case of non-manufacturing, if 20 yen is recorded as an expense in the purchase account when purchasing goods but none are sold, the COGS is naturally zero using the three-part method.

If there is no need to record COGS on the P/L, the difference between the contra accounts, Opening Stock (debit expense) and Closing Stock (credit expense), is used to calculate the gross profit. On the other hand, if goods are recorded as assets upon purchase and none are sold, there is no opportunity to transfer them to COGS, so naturally, COGS is zero.

However, in this case, since the goods are already recorded as assets, inventory and accounting are synchronized, and there is no need to transfer the beginning and ending inventory.

Under the premise that the P/L is only output at the end of the month, expensing upon purchase results in inventory transfers at the end of the month, calculating gross profit, and using the three-part method to calculate COGS, clearly displaying only the expenses for sold items separately on the P/L.

The Timing of Selling and Administrative Expenses and COGS

Selling and administrative expenses are fully expensed in the month they occur, but products are expensed (COGS) only for the sold portion at the time of shipment (in the case of the perpetual inventory method) or at the end of the month (in the case of the three-part method), with the remainder becoming ending inventory as assets. When expensed at the end of the month, part of the total expenses is transferred to COGS, managed separately from selling and administrative expenses on the P/L.

By recording purchases in the purchase account as expenses and synchronizing inventory and accounting at the end of the month using the contra accounts, Opening Stock and Closing Stock, or by recording purchases in the merchandise account as assets and expensing them when sold by recording them in the COGS account, the total profit on the P/L at the end of the month remains the same in either method.

If recorded in the purchase account upon purchase, unsold items increase inventory during the end-of-month inventory transfer, reducing COGS, resulting in the same COGS and profit on the P/L as when expensed upon sale. Thus, expensing upon purchase results in COGS at the end of the month, while recording as assets upon purchase results in COGS upon sale, differing only in timing.

In modern corporate accounting, no company considers all incurred expenses as period costs, focusing only on the total profit calculated by Total Revenue - Total Expenses. Calculating COGS and preparing the P/L is essential.

The perpetual inventory method, which records assets upon receipt and transfers them to COGS with each sale, is convenient for accounting to grasp inventory valuation during the month. On the other hand, the method of recording expenses upon receipt and transferring beginning and ending inventory at the end of the month does not allow for accounting to grasp inventory valuation during the month, but reflecting the results of the monthly physical inventory in accounting allows for asset turnover, bringing physical and numerical values closer.

The Relationship Between Manufacturing Cost and COGS

The manufacturing cost is calculated by multiplying the unit manufacturing cost for the current month by the number of products stored in the warehouse, while COGS is calculated by multiplying the beginning product inventory unit cost or the current month manufacturing cost unit by the shipment quantity. The manufacturing cost unit is determined by the cumulative method (rolling method), which accumulates fixed cost units based on allocation rules using direct labor hours or manufacturing quantities as the basis, calculated using the weighted average method for direct material costs (variable costs).

The product cost shipped to customers in the current month is COGS, but the product unit cost differs between beginning product inventory and current month manufactured products.

If all products manufactured in the current month are shipped, with no ending inventory, the product unit cost is the manufacturing cost unit, and the product warehouse entry quantity and shipment quantity are the same, making manufacturing cost and COGS identical.

Breakdown of Product Value Costs as COGS and Selling and Administrative Expenses for Selling Products

COGS refers to the costs incurred to manufacture the sold products, excluding costs related to sales and management. These selling and administrative expenses are deducted from the gross profit. In Indonesia, there are mainly two accounting entries for material purchases.

Materials are expensed when sold, but selling and administrative expenses are expensed when incurred, thus called period costs.

The Relationship Between COGS and Gross Margin

In the past, when I ran a boutique in Bali, I purchased clothes from Jakarta and sold them in Bali. At that time, the purchase price of the clothes was the COGS, and the difference between sales and COGS was the gross margin, or gross profit. Gross profit is also known as gross margin, and in manufacturing, direct labor costs and indirect labor costs are included in COGS.

On the other hand, in sales, it is often said that "management is the activity of recovering fixed costs (employee salaries and tenant rent) with gross margin." The reason labor costs in manufacturing are included in COGS, while those in sales are not, is that the former are labor costs for manufacturing products, while the latter are labor costs for selling products.

Frequently Asked Questions | Manufacturing Cost, COGS, Selling and Administrative Expenses

These are three points that are easily confused within the framework of corporate accounting.

What is the difference between manufacturing cost and COGS?

Manufacturing cost is the cost of the production process, while COGS corresponds to the cost of the sold portion.

Are selling and administrative expenses included in costs?

They are generally treated as period expenses and not included in manufacturing costs. In price discussions, they need to be viewed separately.

Why is organizing the framework first?

If terms are misaligned, discussions on inventory valuation, profit and loss, and departmental performance will not align.