After all the manufacturing operations are com pleted, the goods are known as finished goods. Obvi ously the cost of the goods on hand must be deducted from the total manufacturing costs to determine the cost of the goods sold during the period. In our illustration we find $20,300 in finished goods on hand while at the beginning of the year there were $19,000 of finished goods on hand. We enter the new inven tory in our adjustment column and transfer old and new inventories to our economic summary column.
Packing material with its charge of $1,300 for the year's purchases presents no new features. From this charge must be deducted the balance of $150 on hand in order to determine the amount consumed dur ing the year.
7. Freight inward.—Freight charges on incoming purchased goods, whether prepaid by the vendor and added to the invoice or paid directly by the purchaser, are properly to be considered as a part of the cost of these goods. On no other basis can there be a proper counting of the cost of raw materials or salable goods on the one hand and of purchased furniture, fixtures and other equipment on the other. Of course when the vendor pays the freight and includes it in his in voice price the problem does not arise.
Nevertheless, the frequent practice has been to charge this freight to a separate inward freight ac count. This leaves an ambiguity since part of this may be on unconsumed raw materials and part even on equipment. Most will be on raw materials con sumed, however. Hence, unless we are to make an expensive analysis of the charges to inward freight, the practical procedure is to assign the whole balance of $900 to manufacturing cost.
8. Manufacturing expenses. — The process of changing raw material into finished goods involves many costs outside of the cost of material alone. Di rect wages, having a balance of $240,000, is the ac count against which we charge the wages of those employes who are directly engaged in manufacturing. To this we added $3,000—representing accrued, but unpaid wages. This total ($243,000) is directly at tributable to certain articles manufactured, hence, it is termed productive or direct wages.
Superintendence, on the other hand, altho it is a factory expense, is spread over the entire work of the labor force. It is seldom that superintendence can be applied directly against any unit or division of the product. Therefore, it is separate, altho it is charged as a part of the manufacturing cost. The other expenses of the factory, such as light, heat and power, factory supplies inclusive of inventory adjustments, and sundry factory expenses, are manufacturing costs and are charged as such in our statement.
Insurance on buildings and machinery, taxes on land and buildings, depreciation of plant and ma chinery, and depreciation on factory buildings, are expenses involved in the manufacturing processes, hence their debit balances are also charges against manufacturing costs. The insurance, for instance, is carried to preserve for us the capital invested in our factory. The factory itself was purchased and is owned as a means to production. Any expenses in connection with it are a part of the manufacturing cost.
In the same way, depreciation on plant and ma chinery, or plant and buildings, is a part of the cost of the service which these assets render us. As they are used as an aid to the process of manufacture the cost of their services is a part of the cost of manufac ture.
9. Interest on mortgage.—Interest on mortgage is payable on January 1 of the year following the date on which the mortgage was taken out. We find already on the books a charge of $375 which cov ers interest on the mortgage for one-half year. If this interest were payable semi-annually this sum would be the amount which was paid on July 1. Now, against the operations of the year, the amount of in terest payable for the year which is $750, or $375 more, must be charged. In the same way there is an accrued charge for light, heat and power, etc.
10. Taxes.—Taxes arise by virtue of governmental authority rather than thru contract. It is difficult to mention the particular right or service of which they are the cost.
The question arises whether taxes are paid in ad vane or whether they accrue during a period, and become payable at the end. Some persons main tain that taxes do not accrue but are payable, in ad vance. The basis of their argument is as follows: The taxes that are payable on January 1, altho levied in the preceding calendar year, were imposed for the purpose of obtaining funds with which to meet the government expenses during the ensuing year. Hence, considered as expenses or as deductions from income, they pertain to the current calendar year. Also, since the liability exists on January 1, proper and complete accounting records require us to make an entry as of that date to the following effect: Taxes $1,000 To taxes payable $1,000 The credit records the liability, and the debit records the expense. If this is the correct view, then on June 30, one-half of the $1,000 balance of the tax account may be considered as pertaining to the future. If a one-year right was created on January 1, then one half of this right still exists as an asset on June 30.