{"id":58802,"date":"2018-09-11T15:58:59","date_gmt":"2018-09-11T08:58:59","guid":{"rendered":"https:\/\/bahtera.jp\/sga\/"},"modified":"2025-03-19T15:56:39","modified_gmt":"2025-03-19T08:56:39","slug":"sga","status":"publish","type":"post","link":"https:\/\/bahtera.jp\/en\/sga\/","title":{"rendered":"The Relationship Between Manufacturing Cost, Cost of Sales, and Selling and Administrative Expenses Representing the Framework of Corporate Accounting"},"content":{"rendered":"<p>Material costs and processing costs incurred at the manufacturing site are the current month\u2019s incurred costs. The costs incurred to produce the products themselves are manufacturing costs (incurred costs based on production quantity), while the costs incurred to produce the products sold are the cost of sales (incurred costs based on shipped quantity). Selling and administrative expenses incurred for sales are deducted from gross profit.<br \/>\n\t\t\t\t<a href=\"https:\/\/bahtera.jp\/en\/cost-management-indonesia\/\" class=\"st-cardlink\" aria-label=\"Cost Management in Indonesia\">\r\n\t\t\t\t<div class=\"kanren st-cardbox\" >\r\n\t\t\t\t\t\t\t\t\t\t<dl class=\"clearfix\">\r\n\t\t\t\t\t\t<dt class=\"st-card-img\">\r\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<img decoding=\"async\" width=\"150\" height=\"150\" src=\"https:\/\/bahtera.jp\/wp-content\/uploads\/2024\/03\/1-2-150x150.jpg\" class=\"attachment-st_thumb150 size-st_thumb150 wp-post-image\" alt=\"\u30a4\u30f3\u30c9\u30cd\u30b7\u30a2\u306e\u539f\u4fa1\u7ba1\u7406\u30b7\u30b9\u30c6\u30e0\" srcset=\"https:\/\/bahtera.jp\/wp-content\/uploads\/2024\/03\/1-2-150x150.jpg 150w, https:\/\/bahtera.jp\/wp-content\/uploads\/2024\/03\/1-2-100x100.jpg 100w\" sizes=\"(max-width: 150px) 100vw, 150px\" \/>\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<\/dt>\r\n\t\t\t\t\t\t<dd>\r\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<p class=\"st-cardbox-t\">Cost Management in Indonesia<\/p>\r\n\t\t\t\t\t\t\t\r\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<div class=\"st-card-excerpt smanone\">\r\n\t\t\t\t\t\t\t\t\t<p>Mass production factories, such as two- and four-wheeler parts manufacturers common in Indonesia, have multiple manufacturing processes. In such cases, processing costs are calculated for each process, and the method of aggregating these costs into the product is called process costing. In this approach, labor costs and manufacturing overheads are recorded at the end of the month by the accounting department, transferred to inventory assets, and then allocated accordingly. On the other hand, in factories producing custom-made items under individual order production, job order costing is used, where costs are aggregated by order number or project number. In this case, &#8230; <\/p>\n\t\t\t\t\t\t\t\t<\/div>\r\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<p class=\"cardbox-more\">\u7d9a\u304d\u3092\u898b\u308b<\/p>\r\n\t\t\t\t\t\t\t\t\t\t\t\t\t<\/dd>\r\n\t\t\t\t\t<\/dl>\r\n\t\t\t\t<\/div>\r\n\t\t\t\t<\/a>\r\n\t\t\t\t  <\/p>\n<h2>Key Points for Conducting Accounting Interviews in Indonesia<\/h2>\n<p>I\u2019m working on business system implementation in Indonesia, and I collaborate with a diverse group of Indonesian staff\u2014some excel at production management, others at accounting, and some at programming. After working together for a long time, I\u2019ve come to realize, albeit belatedly, that the way we grasp the essence of the same problems we face differs.<br \/>\nThis might sound rigid, but even though the essence of things is singular, the way it\u2019s articulated varies depending on the \u201ckey points\u201d of understanding, and I believe the approach to grasping that essence differs from person to person.<br \/>\nIt\u2019s fine for people to have different ways of understanding the same reality, and when I discover that someone else\u2019s way of perceiving the essence differs from how I\u2019d express it, I find it somewhat moving.<br \/>\nUnlike those in the accounting department who deal with corporate accounting daily, I interact with accounting in the unique context of accounting system implementation. When hearing practical accounting matters from clients, I abstract it into a rather global definition: \u201cAccounting is the rearrangement of numbers within the rules of the trial balance equation.\u201d  <\/p>\n<div class=\"graybox\">\n<div class=\"maruck\">\n<ul>\n<li>Assets + Expenses = Liabilities + Net Assets + Revenue<\/li>\n<\/ul>\n<\/div>\n<\/div>\n<p>This equation holds because the profit, which is the difference between expenses and revenue in the income approach, becomes the increase in net assets in the property approach. This is the foundation of my accounting knowledge.<br \/>\nWithout this understanding, I couldn\u2019t explain the cost of sales or period costs.  <\/p>\n<h2>Transferring Three Accounts\u2014Beginning Inventory, Monthly Purchases, and Ending Inventory\u2014to the Cost of Sales Account<\/h2>\n<p>Recording purchases as they happen means not managing them as assets in accounting during the month. Thus, at month-end, you need to transfer the beginning and ending inventory amounts to synchronize inventory with accounting.<br \/>\nIf you don\u2019t do this, you can\u2019t create a B\/S, right? <img decoding=\"async\" class=\"wp-image-28651 aligncenter\" style=\"font-size: 1rem;\" src=\"https:\/\/bahtera.jp\/wp-content\/uploads\/stock-1.jpg\" alt=\"Incurred Costs and Inventory in a Production Management System\" width=\"563\" height=\"424\" srcset=\"https:\/\/bahtera.jp\/wp-content\/uploads\/stock-1.jpg 734w, https:\/\/bahtera.jp\/wp-content\/uploads\/stock-1-300x226.jpg 300w\" sizes=\"(max-width: 563px) 100vw, 563px\" \/><br \/>\nThe contra accounts for this inventory transfer (expense contra accounts), Opening Stock (expense) and Closing Stock (negative expense), fall under P\/L items.  <\/p>\n<div class=\"graybox\">\n<div class=\"maruck\">\n<ul>\n<li>Total Revenue \u2212 Total Expenses = Total Profit<\/li>\n<\/ul>\n<\/div>\n<\/div>\n<p>This way, total profit can ultimately be confirmed from the trial balance amounts, but on the P\/L, gross profit must be explicitly stated.  <\/p>\n<div class=\"graybox\">\n<div class=\"maruck\">\n<ul>\n<li>Sales \u2212 Cost of Sales = Gross Profit<\/li>\n<\/ul>\n<\/div>\n<\/div>\n<p>To record this, you need to determine the ending inventory amount and transfer a portion of total expenses to the cost of sales by offsetting it against the beginning inventory and monthly manufacturing costs.  <\/p>\n<div class=\"graybox\">\n<div class=\"maruck\">\n<ul>\n<li>Opening Stock + Monthly Purchases \u2212 Closing Stock = Cost of Sales<\/li>\n<\/ul>\n<\/div>\n<\/div>\n<p>This means zeroing out the balances of the three accounts\u2014Opening Stock, Closing Stock, and monthly purchases\u2014eliminating them from the P\/L, and setting the difference as the balance of the cost of sales account.<br \/>\nFor a non-manufacturing example, if you record a 20-yen purchase as an expense in the purchase account but don\u2019t sell a single unit, the cost of sales under the three-way method is naturally 0.  <\/p>\n<div class=\"graybox\">\n<div class=\"maruck\">\n<ul>\n<li>Beginning Inventory (0) + Monthly Purchases (20) \u2212 Ending Inventory (20) = Cost of Sales (0)<\/li>\n<\/ul>\n<\/div>\n<\/div>\n<p>If there\u2019s no need to list the cost of sales on the P\/L, total profit is calculated as the difference between Opening Stock (debit expense) and Closing Stock (credit expense), the contra accounts when transferring beginning and ending inventory.<br \/>\nOn the other hand, if you record purchases as assets and don\u2019t sell any, there\u2019s no chance to transfer them to the cost of sales, so naturally, the cost of sales is 0.<br \/>\nIn this case, since the goods are already recorded as assets, inventory and accounting are synchronized, so there\u2019s no need to transfer beginning and ending inventory.<br \/>\nUnder the major premise that the P\/L is only generated at month-end, expensing purchases at the time of acquisition means inventory transfers occur at month-end to calculate total profit. Further applying the three-way method to calculate the cost of sales allows the expenses for sold items to be clearly separated on the P\/L.  <\/p>\n<div class=\"graybox\">\n<div class=\"maruno\">\n<ol>\n<li>The difference between total revenue and total expense items is total expense:<br \/>\nTotal Revenue \u2212 Total Expenses = Total Profit<\/li>\n<li>Transfer beginning and ending inventory to Opening Stock and Closing Stock accounts:<br \/>\n(Total Revenue + Closing Stock) \u2212 (Total Expenses + Opening Stock) = Total Profit<br \/>\n\u21d2 The difference between beginning and ending inventory goes to asset changes<\/li>\n<li>Separate total revenue into sales and other revenue, and total expenses into purchases and other expenses:<br \/>\nSales \u2212 (Opening Stock + Monthly Purchases \u2212 Closing Stock) + (Other Revenue \u2212 Other Expenses)<\/li>\n<\/ol>\n<\/div>\n<\/div>\n<h2>Timing of Selling\/Admin Expenses and Cost of Sales<\/h2>\n<p>Selling and administrative expenses are fully expensed in the month they occur, but products are expensed (turned into cost of sales) only for the sold portion\u2014at shipment (in perpetual recording) or month-end (in the three-way method)\u2014with the remainder staying as ending inventory assets.<br \/>\nWhen expensing at month-end, you transfer a portion of total expenses to the cost of sales within the total expenses and manage it separately from selling\/admin expenses on the P\/L.<br \/>\nWhether you expense purchases by recording them in the purchase account and synchronize inventory with accounting at month-end using the expense contra accounts Opening Stock and Closing Stock, or record purchases as assets in the goods account and expense them as cost of sales when sold, the total profit on the month-end P\/L remains the same.<br \/>\nIf purchases are recorded in the purchase account and nothing is sold, the inventory transfer at month-end (beginning and ending inventory) increases inventory and reduces the cost of sales. Ultimately, this matches the cost of sales and profit on the P\/L when expensing only upon sale.<br \/>\nIn short, expensing at purchase and turning it into cost of sales at month-end versus recording as assets at purchase and turning it into cost of sales upon sale is merely a difference in the timing of when it becomes cost of sales.<br \/>\nNo modern corporate accounting considers all incurred expenses as period costs and deems it sufficient to know only the total profit calculated as total revenue \u2212 total expenses. Calculating the cost of sales and preparing the P\/L is essential.<br \/>\nThe perpetual method\u2014recording purchases as assets and transferring to cost of sales with each sale\u2014is convenient for tracking inventory valuation in accounting during the month. However, expensing purchases at acquisition and transferring beginning and ending inventory at month-end doesn\u2019t allow mid-month inventory valuation in accounting. Still, it excels at reflecting monthly physical inventory counts in accounting, metabolizing assets to align numbers with reality.  <\/p>\n<h2>Relationship Between Manufacturing Cost and Cost of Sales<\/h2>\n<p>Manufacturing cost is the monthly manufacturing cost unit price multiplied by the number of products received in the warehouse, while cost of sales is the beginning product inventory unit price or monthly manufacturing cost unit price multiplied by the shipped quantity.<br \/>\nUsing the total average method, the direct material cost (variable cost) unit price is calculated, and fixed cost unit prices are accumulated by process based on allocation rules tied to direct labor time or production quantity, determining the manufacturing cost unit price via the roll-up method (cumulative method).  <\/p>\n<div class=\"graybox\">\n<div class=\"maruck\">\n<ul>\n<li>Manufacturing Cost = Product Manufacturing Unit Price \u00d7 Production Quantity<\/li>\n<li>Manufacturing Cost = Beginning WIP + Monthly Incurred Costs \u2212 Ending WIP<\/li>\n<\/ul>\n<\/div>\n<\/div>\n<p>The cost of products shipped to customers in the month is the cost of sales, but the unit price differs between beginning product inventory and monthly manufactured products.  <\/p>\n<div class=\"graybox\">\n<div class=\"maruck\">\n<ul>\n<li>Cost of Sales = Beginning Product Inventory Unit Price \u00d7 Shipped Quantity + Monthly Manufacturing Cost Unit Price \u00d7 Shipped Quantity<\/li>\n<li>Cost of Sales = Beginning Product Inventory + Monthly Manufacturing Cost \u2212 Ending Product Inventory<\/li>\n<\/ul>\n<\/div>\n<\/div>\n<p>If all products manufactured in the month are shipped and no ending inventory remains, the product unit price is the manufacturing cost unit price, and since warehouse receipt quantity equals shipped quantity, manufacturing cost and cost of sales become identical.  <\/p>\n<h2>Product Value Breakdown as Cost of Sales vs. Expenses for Selling as Selling\/Admin Expenses<\/h2>\n<p><img decoding=\"async\" class=\"wp-image-37933 aligncenter\" src=\"https:\/\/bahtera.jp\/wp-content\/uploads\/1-97.jpg\" alt=\"Cost of Sales and Selling\/Admin Expenses\" width=\"630\" height=\"216\" srcset=\"https:\/\/bahtera.jp\/wp-content\/uploads\/1-97.jpg 1230w, https:\/\/bahtera.jp\/wp-content\/uploads\/1-97-300x103.jpg 300w, https:\/\/bahtera.jp\/wp-content\/uploads\/1-97-768x263.jpg 768w, https:\/\/bahtera.jp\/wp-content\/uploads\/1-97-1024x351.jpg 1024w, https:\/\/bahtera.jp\/wp-content\/uploads\/1-97-980x336.jpg 980w\" sizes=\"(max-width: 630px) 100vw, 630px\" \/> The cost of sales is the expense incurred to manufacture the products sold, excluding costs for selling or management. These selling and administrative expenses are deducted from gross profit.<br \/>\nIn Indonesia, there are two main accounting entry patterns for material purchases:  <\/p>\n<div class=\"graybox\">\n<div class=\"maruno\">\n<ol>\n<li>Record in the materials account (asset) and expense only the used portion (monthly material cost):<br \/>\n(This can be expensed continuously as used or in a lump sum at month-end like stored goods.)<\/li>\n<li>Record in the purchase account (expense), expense the beginning material inventory (positive expense), and deduct the ending material inventory (negative expense) to calculate monthly material cost:<br \/>\n(Strictly speaking, the purchase account has a strong asset-like nature as a prepaid expense.)<\/li>\n<\/ol>\n<\/div>\n<\/div>\n<p>Materials are expensed only when sold, but selling and administrative expenses are expensed when incurred in the relevant accounting period, hence called <strong>period costs<\/strong>.  <\/p>\n<h2>Relationship Between Cost of Sales and Gross Profit<\/h2>\n<p>Back when I ran a boutique in Bali, I\u2019d buy clothes from Jakarta and sell them in Bali. The purchase price of the clothes was the cost of sales, and subtracting the cost of sales from sales gave the gross profit (marginal profit), i.e., gross profit.<br \/>\n\t\t\t\t<a href=\"https:\/\/bahtera.jp\/en\/marginal-profit\/\" class=\"st-cardlink\" aria-label=\"True Story! Learning About Marginal Profit and Break-Even Point from My Boutique Management Experience in Bali\">\r\n\t\t\t\t<div class=\"kanren st-cardbox\" >\r\n\t\t\t\t\t\t\t\t\t\t<dl class=\"clearfix\">\r\n\t\t\t\t\t\t<dt class=\"st-card-img\">\r\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<img decoding=\"async\" width=\"150\" height=\"150\" src=\"https:\/\/bahtera.jp\/wp-content\/uploads\/2015\/06\/1-150x150.jpg\" class=\"attachment-st_thumb150 size-st_thumb150 wp-post-image\" alt=\"\u30a4\u30f3\u30c9\u30cd\u30b7\u30a2\u30d0\u30ea\u5cf6\" srcset=\"https:\/\/bahtera.jp\/wp-content\/uploads\/2015\/06\/1-150x150.jpg 150w, https:\/\/bahtera.jp\/wp-content\/uploads\/2015\/06\/1-100x100.jpg 100w\" sizes=\"(max-width: 150px) 100vw, 150px\" \/>\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<\/dt>\r\n\t\t\t\t\t\t<dd>\r\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<p class=\"st-cardbox-t\">True Story! Learning About Marginal Profit and Break-Even Point from My Boutique Management Experience in Bali<\/p>\r\n\t\t\t\t\t\t\t\r\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<div class=\"st-card-excerpt smanone\">\r\n\t\t\t\t\t\t\t\t\t<p>Costs can be divided into variable costs and fixed costs. The break-even point sales, which recover fixed costs, are determined by the marginal profit rate\u2014the ratio of the purchase price (variable cost) to sales. In other words, direct costing calculates how many clothes need to be sold to achieve the break-even point sales, considering only variable costs as the original cost.<\/p>\n\t\t\t\t\t\t\t\t<\/div>\r\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<p class=\"cardbox-more\">\u7d9a\u304d\u3092\u898b\u308b<\/p>\r\n\t\t\t\t\t\t\t\t\t\t\t\t\t<\/dd>\r\n\t\t\t\t\t<\/dl>\r\n\t\t\t\t<\/div>\r\n\t\t\t\t<\/a>\r\n\t\t\t\t<br \/>\nGross profit, also called gross margin, includes direct and indirect labor costs in manufacturing as part of the cost of sales.<br \/>\nIn retail, a common saying is, \u201cManagement is the act of recovering fixed costs (employee salaries, tenant rent) with gross profit.\u201d<br \/>\nThe reason labor costs in manufacturing are included in the cost of sales while those in retail are not is that the former are labor costs to produce products, and the latter are labor costs to sell products.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Material costs and processing costs incurred at the manufacturing site are the current month\u2019s incurred costs. The costs incurred to produce the products themselves are manufacturing costs (incurred costs based on production quantity), while the costs incurred to produce the products sold are the cost of sales (incurred costs based on shipped quantity). Selling and administrative expenses incurred for sales are deducted from gross profit.<\/p>\n","protected":false},"author":2,"featured_media":86389,"parent":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[624],"tags":[],"class_list":["post-58802","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-cost-management"],"_links":{"self":[{"href":"https:\/\/bahtera.jp\/en\/wp-json\/wp\/v2\/posts\/58802","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/bahtera.jp\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/bahtera.jp\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/bahtera.jp\/en\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/bahtera.jp\/en\/wp-json\/wp\/v2\/comments?post=58802"}],"version-history":[{"count":0,"href":"https:\/\/bahtera.jp\/en\/wp-json\/wp\/v2\/posts\/58802\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/bahtera.jp\/en\/wp-json\/wp\/v2\/media\/86389"}],"wp:attachment":[{"href":"https:\/\/bahtera.jp\/en\/wp-json\/wp\/v2\/media?parent=58802"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/bahtera.jp\/en\/wp-json\/wp\/v2\/categories?post=58802"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/bahtera.jp\/en\/wp-json\/wp\/v2\/tags?post=58802"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}