Goods in Transit

Goods in Transit: Definition Goods in transit are purchased goods that have not yet been received by the purchaser. These goods are easily overlooked when counting the ending inventory because they are not physically located at either the seller’s or the purchaser’s warehouse. Accounting Treatment of Goods in Transit When accounting for goods in transit, the fundamental question is whether a sale…

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Periodic Inventory System

What Is a Periodic Inventory System? A periodic inventory system does not keep continuous track of ending inventories and the cost of goods sold. Instead, these items are determined at the end of each quarter, year, or accounting period.  Although this method offers ease of use for record-keeping, it hinders the managerial decision-making process. However, the sheer volume of transactions in some…

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Economic Order Quantity (EOQ): Practical Problems and Solutions

Problem 1 The John Equipment Company estimates its carrying cost at 15% and its ordering cost at $9 per order. The estimated annual requirement is 48,000 units at a price of $4 per unit. Required: What is the most economical number of units to order? How many orders should be placed in a year? How often should an order be placed? Solution 1. What is the most economical number of units to order? An…

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How to Calculate Profit and Loss on Contracts

The procedures available for determining the profit or loss on contracts under different circumstances are summarized in this article. 1. Profit on Completed Contracts For contracts completed during the accounting year, the full contract price, whether payable in a lump sum on the completion of the contract or payable in installments, is debited to the contractee’s personal account and credited to…

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Cost Plus Contract

Cost Plus Contract: Definition Contractors may sometimes accept a contract on the condition that the contractee will bear all costs incurred in executing the contract, plus a fixed rate or percentage of profit calculated based on the total cost. A contract of this type is known as a cost plus contract. It is generally adopted in cases where the probable cost of the contract cannot be ascertained i…

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Contract Costing

Contract Costing: Definition Contract costing is the method of costing applied in a business where separate contracts of a non-repetitive nature are undertaken. According to Sharie, “contract or terminal cost accounts are applicable to a concern which makes specific contracts and requires to know the cost of each.” A contract is a job of a large size that may extend beyond one accounting period. T…

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Contract Account

What Is a Contract Account? When a contractor has accepted a contract, a separate account is opened for each contract, bringing together all the costs relating to a particular contract. A serial number is assigned to each contract, which is known as a contract account. Explanation of Contract Account All expenses incurred in fulfilling a contract (e.g., materials, wages, direct expenses, cost of s…

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Cost Price Method

Explanation of Cost Price Method Under cost price method, materials issued to production, are charged out on the basis of actual cost i.e., the cost at which these have been purchased. As we already know, the actual cost of materials consists of purchase price or invoice price (less trade discount and quantity discount), import duty, sales tax, commission on purchase, freight, carriage, cartage, t…

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Pricing of Materials Returned to Vendors

Materials returned to vendors may be recorded on the invoice price or in accordance with the method adopted for pricing out material issues. Recording of materials returned at invoice price is not realistic. This is because the price per unit that a vendor grants on the return of materials cannot be the same as the original invoice cost. Adjustments for discount, freight, carriage inward, etc., mu…

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Pricing Methods of Material Issued

In a manufacturing concern, there are different approaches to valuing or pricing materials issued for production. The exact method used usually depends on the nature of the materials and the nature of the business itself. Whichever method of pricing materials issued is followed, the actual issue of materials will always be recorded from the earliest consignment. The main methods used to price mate…

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