Transfer of Goods Manufactured From The Manufacturing Department To The Sales Department - SS2 Accounting Lesson Note

The transfer of goods from the manufacturing department to the sales department is an important process in any manufacturing organization. This process is also known as the transfer of finished goods from the production department to the sales department.

The transfer of goods involves several steps, including the identification and packing of finished goods, recording the transfer in the accounting system, and physically moving the goods to the sales department. The transfer is usually accompanied by a delivery note, which contains information about the quantity, description, and value of the goods being transferred.

Once the goods are transferred to the sales department, they become part of the inventory held for sale. The sales department is responsible for selling the goods and generating revenue for the organization. The revenue generated from the sale of the goods is recorded in the accounting system, and the cost of goods sold is also recorded to determine the profit or loss on the sale of the goods.

Preparation of sales department account

Question:

XYZ Ltd produces 1,000 units of a product and transfers 800 units to the sales department during the month of June 2023. The cost of manufacturing the 1,000 units was ₦100,000, and the cost of the 800 units transferred to the sales department was ₦80,000. The selling price of each unit is ₦200, and the sales department sold 600 units during the month of June 2023.

The following journal entries would be recorded in the accounting system to reflect the transfer of goods from the manufacturing department to the sales department and the sale of goods by the sales department:

To record the transfer of finished goods from the manufacturing department to the sales department:

Account

Debit (₦)

Credit (₦)

Finished goods inventory (800 units)

Work-in-progress inventory

80000

To record the sale of goods by the sales department:

Account

Debit (₦)

Credit (₦)

Sales revenue

Less: Cost of goods sold

Gross profit

48000

120000

72000

The cost of goods sold is calculated as follows:

Cost of goods sold = [Cost of goods transferred to sales department / Total units produced] x Units sold = [₦80000 / 1000] x 600 = ₦48000

The gross profit on the sale of goods is calculated as follows:

Gross profit = Sales revenue - Cost of goods sold = ₦120000 - ₦48000 = ₦72000