HASKINS & SELLS
Analyzing Cost of Manufacture and Cost of Goods Sold
THE following article is from a contributor
who prefers to remain anonymous.
Modesty or a desire to dodge responsibility
are the motives which usually prompt an author to hide behind the cloak of anonymity. In the present case we are sure it is modesty. The essay bears too well the ear-marks of an accountant who has suffered. It sounds the plaintive note of one who has been the victim of working papers found wanting in the day of judgment.
It suggests not only more careful attention to the matter in practice but some hard study on the part of every accountant who doesn't know the "cost of goods sold" section of the income statement
forwards, backwards, and up-side-down.
"One of the requirements of engagements
involving the preparation of federal tax returns for manufacturing companies is an analysis of cost of goods sold to show materials purchased or consumed, labor, manufacturing expense—in reasonable detail,
and inventories at the beginning and end.
"Judging from the incompleteness of the working papers, the importance of this analysis is underestimated by many accountants while others become confused in their efforts to obtain the desired information.
"It is not uncommon for accountants to report that this information cannot be
obtained because costs are kept by units or classes of production. In other instances
where the books show estimated costs, sub-divided as between material, labor and expense, these estimated figures are reported. And we have known accountants
to sub-divide the total cost of goods sold into the three elements on a percentage basis ascertained from cost reports. Some accountants who are not familiar with the tax forms, have reported that cost of goods sold could not be analyzed to show material, labor and expense,
because these elements could not be segregated in the inventories at the beginning
"An audit of a manufacturing company which does not embrace an examination of cost of manufacture, and cost of goods sold, whether required for tax purposes or not, overlooks what is usually one of the most important, if not the most important, items in an audit.
"It is obviously inconsistent to analyze selling and administrative expenses in great detail but to neglect to analyze much larger expenditures representing the cost of manufacture and cost of goods sold.
"The government's purpose in requiring the information called for by the tax returns
is to ascertain whether the charges to cost of manufacture and cost of goods sold, are proper from a tax standpoint. It should hardly be necessary to say that