When companies have returns, they must calculate net sales, which is revenue minus sales returns and allowances. The result, or net sales, is recorded at the top line of the income statement in place of revenue, which is typical for retailers. Below is the income statement of the U. The period represents Q2 of , according to the company's Q report. The breakdown of the company's costs on the income statement is important in determining where profitability exists and where it does not.
For Tesla, we can see that although the company generated a gross profit, the company reported a loss in both periods. Tesla's income statement illustrates how overhead costs, as well as other operating expenses, can impact a company's profitability.
Also, the cost of debt, shown as interest expense, was a contributing factor in the company's loss in both periods. In short, a company that reports an increase in gross profit doesn't necessarily mean the company is more profitable.
Conversely, if a company is spending a significant amount of its cash and borrowings on research and development, it might report a loss for the quarter under net income.
However, gross profit might tell a different story, showing an increasing trend of profitability. As with any financial metric, gross profit and the costs of a company should be compared to other companies within the same industry.
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Create a personalised content profile. Measure ad performance. Select basic ads. Create a personalised ads profile. Select personalised ads. If the purchase is made on account, the entry is as shown:. The entry to reflect these actions is:. The direct cost of factory labor includes the direct wages paid to the employees and all other payroll costs associated with that labor. Typically, this includes wages and the payroll taxes and fringe benefits directly tied to those wages.
The accounting system needs to keep track of the labor and the other related expenses assigned to a particular job. These records are typically kept in a time ticket submitted by employees daily. The labor is recorded as shown:. Indirect materials also have a materials requisition form, but the costs are recorded differently. They are first transferred into manufacturing overhead and then allocated to work in process.
The entry to record the indirect material is to debit manufacturing overhead and credit raw materials inventory. Indirect labor records are also maintained through time tickets, although such work is not directly traceable to a specific job. The difference between direct labor and indirect labor is that the indirect labor records the debit to manufacturing overhead while the credit is to factory wages payable.
The entry is:. Dinosaur Vinyl also records the actual overhead incurred. This is the cost of labor directly associated with the production of goods. This category of cost has been called into question, since most production labor is actually needed to provide a minimal level of staffing to the production area, and so should really be considered an overhead cost.
Only in cases where labor costs can be specifically associated with a particular unit of production should costs be considered direct labor. For example, if a production worker is paid a piece-rate wage for each unit manufactured, this can be considered a direct labor cost. This category is comprised of all the costs incurred that are needed to run a factory, but which are not associated with a specific unit of inventory.
Manufacturing overhead can include, but is not limited to, equipment depreciation, equipment maintenance, factory rent, factory utilities, materials handling staff wages, production supplies, quality assurance staff wages, and supervisor salaries.
Manufacturing overhead is typically assigned to individual units of production, based on a rational and consistently-applied allocation methodology. Direct materials and direct labor costs are also assigned to individual units. If the number of machine hours can be related to the manufacturing overhead, the overhead can be applied to each department based on the machine hours. The formula for overhead allocation is:. Rock City Percussion determined that machine hours is the appropriate base to use when allocating overhead.
It was also estimated that the total machine hours will be 34, hours, so the allocation rate is computed as:. The amount transferred from the shaping department is the same amount listed on the production cost report in Figure. The journal entry is:. Transferred Goods from the Packaging Department to Finished Goods The computation of inventory for the packaging department is shown in Figure.
The value of the inventory transferred to finished goods in the production cost report is the same as in the journal entry:. There are two transactions when recording a sale. One entry is to transfer the inventory from finished goods inventory to cost of goods sold and is at the cost of the product. The second transaction is to record the sale at the sales price. The compound entry to record both transactions for the sale of units on account is:.
The importance of properly recording the production process is illustrated in this report on work in process inventory from InventoryOps. Figure In a process costing system, which account shows the overhead assigned to the department?
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