Question

Which one of these are reflected in a company's P/L statement: cost of underage or cost of overage? Do you think the way these costs are reported in the P/L statement affect inventory related decisions? Why or why not?

Answer 1

Solution :

Overage occurs when there are more items on hand ( physical stock) rathar than the records indicate ( book stock) .This means that excess has been charged to the operating account through cost of goods sold.

Yes, overage needs to be recified by passing the below journal entry

Inventories A/c... Dr ( Balance sheet) ( to book the asset)

to over/short inventory .... ( profit and loss) ( to reduce the excess cost booked earlier , this will reduce the cost of good sold)

Same concept is applicable to underage.

Underage occurs when there are less items on hand ( physical stock) rathar than the records indicate ( book stock) .This means that some costs have not been charged to the operating account through cost of goods sold.

Yes, underage needs to be recified by passing the below journal entry

Over/short inventory .... ( profit and loss) ( to book the shortage , this will increase the cost of good sold)

to Inventories A/c ( Balance sheet) ( to reduce the asset as the physical stock is less)

Yes, it is very important to record these costs . Once they are booked , it will give a clearer valaution of inverntoy as on the balance sheet reporting date. The reconciliaioton of physical stock to book stock is very important as any excess or shortage needs to be recorded in the books of accounts immediately to give a true picture on the financials.