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 … Read more

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 … Read more

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 … Read more

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 … Read more

Manufacturing Business

Explanation In the previous few articles, we have seen how traders prepare their set of final accounts. Their Trading Account discloses their gross profit, which is simply the excess of sales over cost of goods sold in the year. Calculating the cost of goods sold by a trader in a particular year is fairly simple … Read more

Total Cost of Manufacturing

The total cost of manufacturing a product has three elements, namely: Raw material used (or Direct material cost) Direct labour (or Direct wages) Production overhead (or Factory overhead, or Works overheads) A manufacturing business maintains a separate raw materials purchases account for each type of raw material used by its factory. Similarly, it maintains separate … Read more

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, … Read more

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 … Read more

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 … Read more

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 … Read more