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3.6. Cost Flows to the Financial Statements

If you are unclear about the flow of production costs into the financial statements, review the cost flow graphic presented in the Introduction to Managerial Accounting chapter.. In so doing, remember that the nonmanufacturing "period" costs are charged directly to expense in the period incurred; they do not enter into the determination of inventory or cost of goods sold.

3.7. Subsidiary Accounts

You learned earlier in the book about subsidiary accounts. For example, a company's general ledger will reveal the total accounts receivable, total accounts payable, total equipment, etc. But, there is also need to know subsidiary details about each of these accounts. In other words, you must be able to identify the specific customers who owe money, how much is due to each vendor, how much depreciation to record for each asset, and so forth. The same is true for the Work in Process account. While it is imperative to know the total dollar value of all jobs, a company must also be able to pinpoint the amount attributable to each job. This is accomplished via an account numbering scheme where each job is given a unique number. This enables ease of data mining. The chart of accounts typically includes a number where the leading digits indicate the control account, and the trailing digits indicate the subsidiary account. For work in process, this numbering could go as illustrated below.

Account Number

Job A


$ 35,000

Job B



Job Z



Total for all jobs



While the exact mechanics of maintaining subsidiary account balance information can vary, what is important is that you could inspect the general ledger and financial statements, and find $290,000 in work in process. The subsidiary account information should be sufficient to allow you to find that Job A represents $35,000 of the total, Job B represents $25,000, and so forth.

3.8. Global Trade and Transfers

Companies engaged in international commerce often establish separate operating units around the globe. For instance, a company may establish a manufacturing facility in a country with lower wages and costs of production. This trend has introduced a myriad of complex costing issues which generally fall under the heading of "transfer pricing."

The heart of the issue is how to assess costs and set prices for goods produced in one venue and transferred to an affiliate in another. The governments of each country have a keen interest in taxing activities within their domain (whether it be by a value added tax, income tax, tariff system, custom duties, etc.). And, companies will envision an opportunity to shift profits from high tax jurisdictions to low tax jurisdictions by shuffling costs and prices between entities.

This is a fertile area of tax dispute, and one that keeps many managerial accountants quite busy. In the main, the applicable rules attempt to require the use of fair and equitable job costing, and require that transfers be based on "arms length" transaction pricing. But, the devil is in the details of implementation. A recent look on an internet search engine turned up almost five million hits for "transfer pricing rules!"

The above transfer pricing issues are not limited to global companies. Similar issues can arise when products are shipped between affiliated companies in different states or provinces. Also, affiliated companies may have divisional profit sharing, causing managers working for the same corporate parent to debate the costs assigned to products produced by their respective unit. As you can see, there is a lot more to job costing than just adding up costs!

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