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Cost Accounting

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Treatment of Stock

Stock may be of raw materials, of finished goods, or of work-in-progress.

(i) Stock of raw materials: With the help of stock of raw materials at the beginning and at the end of any accounting period, value of raw materials consumed is calculated. In the total amount of raw materials purchased, the stock at the beginning is added and closing stock is subtracted to arrive at the value of raw materials consumed.

Stock of raw materials may be valued at according to any of the methods discussed in the materials, e.g. FIFO, LIFO, average etc.

Example: From the following calculate the value of raw materials consumed:

Value of raw materials consumed:

$ 50,000 + $ 10,000 – $ 8000 = $ 52,000

(ii) Stock of finished goods: In the cost of production relating to a particular commodity or unit of production, the opening stock of finished goods is added and closing stock subtracted to find out the cost of production of goods sold.

Stock of finished goods is generally valued at the total cost of production: The selling and distribution overheads are charged on units sold and not on units produced and, therefore, the value of stock at the end takes into account the total production costs. The current cost is considered while valuing closing stock on the assumption that the stocks are being disposed off on first in first out basis; thus the last year’s stocks are over and whatever remains is out of the current year’s lot of production.

(iii) Stock of work-in-progress: Work-in-progress means units which are not yet complete but on which work has been done. Thus, it represents goods which are in the process of manufacturing. Generally, such goods bear a proportionate part of factory overheads besides raw materials and direct wages and, therefore, opening stock of work-in-progress is taken into consideration in the cost sheet while computing the works cost of goods manufactured during the year. Some concerns, however, follow the practice of valuing stock of work-in-progress at prime cost. In such a case the stock of work-in-progress should be taken note of while calculating the prime cost.

The practice of valuing work-in-progress at prime cost does not seem to be very correct because after all some works expenses have been incurred on such goods. “The accountants cost hand book” edited by Professor I. Dickey also states. “The value of work-in-progress consists of direct material, direct labour and manufacturing overheads accumulated to the stage of completion reached at the end of a period.” Thus, the factory overheads should be generally included in the valuation of work-in-progress.