Determining Manufacturing Costs Using T-Accounts and Simple Mathematics

Abstract

Accounting is a system to provide information to decision-makers about a company. To facilitate decision-making, accounting reports should provide information that has predictive ability, Beaver, Kennelly, and Voss (1968). The Pathways Commission continues in the same vein and argues that accounting should provide information that facilitates good decisions. Managerial accounting tracks three types of costs: direct materials, direct labor, and factory overhead as these costs move through the manufacturing process from raw materials to work-in-process inventory to finished goods inventory and finally to cost of goods sold. T-accounts are a technique that company managers can use to keep track of costs to determine prices and profits. We demonstrate how to use T-Accounts in a simple manufacturing company to track costs and profits.