Revenue

Revenue Definition The amount that a business earns by selling goods or providing services is called revenue. Explanation Remuneration for goods sold or services provided is called revenue. It includes both cash received for goods sold and services rendered and accounts receivable for goods sold and services rendered on credit. Revenues that appear in the trial balance are of the following two kin…

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Explanation and Treatment of Direct Expenses

All direct expenses are recorded on the debit side of the Trading Account. This article provides a detailed explanation of various direct expenses. Opening Stock or Opening Inventory In a trading business, opening stock consists of different types of finished goods. By contrast, in a manufacturing business, opening stock consists of raw materials, work-in-progress, and finished goods. Unsold closi…

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Difference Between Cost and Expense

In manufacturing accounting, it is important to know the difference between cost and expense. However, in general, these two terms are considered interchangeable. What Is Cost? The amount of cash paid or liability incurred for a commodity or service is referred to as the cost of that item. The commodity or service will obtain sales revenue in the future. In other words, it represents the amount in…

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Cost Accounting Formulas

The following formulas are useful in cost accounting to determine different types of costs. Prime cost = Direct materials consumed + Direct labor Conversion cost = Direct materials + Factory overhead Factory cost = Direct materials + Direct labor + Factory overhead Cost of goods manufactured = Direct materials consumed + Direct labor + Factory overhead + Opening work-in-progress (WIP)- Closing WIP…

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Manufacturing Business

In other articles, we have examined how traders prepare their final accounts. Their trading account discloses their gross profit, which is simply the excess of sales over the cost of goods sold in the year. Calculating the cost of goods sold by a trader in a particular year is fairly simple because traders sell their goods in the same form in which they are purchased. The trader’s purchases accoun…

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Total Cost of Manufacturing

The total cost of manufacturing a product has three elements, namely: Raw materials used (or direct materials cost) Direct labor (or direct wages) Production overhead (or factory overhead or works overhead) A manufacturing business maintains separate raw materials purchase accounts for each type of raw material that its factory uses. Similarly, it maintains separate ledger accounts for direct wage…

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Direct and Indirect Materials Cost

Definition and Explanation Direct Materials Cost A direct material is any commodity that enters into and becomes a constituent element of a product. Thus, cotton is a direct material for textile goods, leather for shoes, wood (or steel or plastic) for furniture, and so on. Some products have more than one direct material. For example, biscuits are made not only of flour but also sugar, milk, oils,…

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Direct and Indirect Labor Cost

What Is Labor? Labor is defined as the cost of services involving human resources. Noteworthily, labor is also the most mobile factor in production. There are two broad types of labor: Direct labor Indirect labor Direct Labor Direct labor refers to labor that is directly involved in the production of a good. For example, in a small carpentry business, the efforts of individuals who cut, join, poli…

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Direct and Indirect Expenses

Expenses An expense is a cost that has been incurred in the process of earning income and revenue. In simple words, the costs of doing business are called expenses. Examples of expenses include routine expenses such as purchases, salaries, commissions, and utility bills. Expenses that appear in the trial balance are one of the following two kinds: Direct expenses Indirect or operating expenses Dir…

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Prime Cost

Prime Cost: Definition Prime cost is the aggregate of direct material cost, direct labor cost, and direct expenses. It is also known as ‘flat cost,’ ‘first cost,’ or ‘direct cost.’ Once the cost of raw materials has been ascertained, the cost of direct labor and direct expenses is known. The prime cost can be calculated by adding up the three figures. Prime Cost: Explanation Prime costs are the su…

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