PERIODIC COST ACCUMULATION SYSTEMS
The first step in comprehending a periodic cost accumulation system is to understand the flow of costs as goods pass through the various stages of production. The flow of costs in a manufacturing company, under a periodic cost accumulation system, is shown in Figure. The cost of goods put into production (direct materials + direct labor + factory overhead) plus the cost of work-in-process inventory at the beginning of the period equals the cost of goods in process during the period. In order to determine the cost of goods manufactured, the cost of ending work-in-process inventory is subtracted from the cost of goods in process during the period. The cost of goods manufactured plus beginning finished goods inventory equals the cost of goods available for sale. When the ending finished goods inventory is deducted from this figure, the cost of goods sold results. The total operating costs can now be computed by adding selling, general, and administrative expenses to the cost of goods sold. For example, assume the following information for a period:
Perpetual cost accumulation systems are designed to provide relevant information to management on a timely basis to aid in planning and control decisions. The major objective in such systems, as was the case with periodic cost accumulation systems, is the accumulation of total costs and the computation of unit costs.
In a perpetual cost accumulation system, the cost of direct materials, direct labor, and factory overhead must first flow through work-in-process inventory in order to reach finished goods inventory. The total costs transferred from work-in-process inventory to finished goods inventory during the period equal to cost of goods manufactured. The ending work-in-process inventory is the balance of un-finished production at the end of the period. As goods are sold, the cost of the goods sold is transferred from the asset account Finished Goods Inventory to the expense account Cost of Goods Sold. The ending finished inventory is the balance of unsold production at the end of the period. The total expenses equal the cost of goods sold plus selling, general, and administrative expenses.