Cost of Goods Manufactured
Things You Must Know
All manufacturing companies follow these steps to manufacture the product:
1) Incur costs to operate the manufacturing facility. These costs are related to the building and management and are called “manufacturing overhead”. (Refer to the Product and Period Cost section for additional information)
2) Purchase direct materials to go into the product (often called raw materials)
3) Move the direct materials to the production line to be used in the product
4) Workers on the production line assemble the product or operate the machines that make the product (direct labor costs)
As the product is being manufactured it is called “Work in Process”
Work in Process consists of:
Manufacturing overhead costs.
5) When the product is finished and ready for sale it is called “Finished Goods”
6) When the product is sold, the cost becomes “Cost of Goods Sold”
The managerial accountant must determine the cost of goods manufactured. Cost of goods manufactured is the cost of making completed products during this period. This is done using the following formula:
Calculate Cost of Goods Manufactured:
Beginning Raw Materials Inventory
+ Purchases of Raw Materials
– Ending Raw Materials Inventory
1) =Materials Used in Production
2) + Direct Labor
3) + Manufacturing Overhead (list all costs)
= Total Manufacturing Costs
4) + Beginning Work in Process Inventory
– Ending Work in Process Inventory
= Cost of Goods Manufactured – Finished Goods
1) Only the material used is part of the cost to make the products.
Material can be purchased and still be on the shelf as raw materials inventory. The difference in what you had available to use (beginning plus purchased this period) and what you have left (RM ending inventory) is what you used.
2) Direct labor used to assemble the products or operate the machines that make the products are part of the cost to make the products.
3) All manufacturing overhead is part of the cost to make the product.
Costs that have the word “plant”, “manufacturing”, or “factory” as part of the description are manufacturing overhead. Costs to manage the process of making the product and to operate the building where the product is produced are manufacturing overhead.
4) Beginning work in process are the first products to be completed during the period. You have to include the costs that were started the period before. Ending work in process is not included because it is not a finished product yet. Cost of goods manufactured means finished goods complete.
You can find the cost per unit of finished product by taking total cost of goods manufactured divided by the number of units produced.
Part of the cost of goods manufactured will be shown on the balance sheet as inventory and part of it will be shown on the income statement as cost of goods sold
Inventory of Finished Goods: Product not yet sold that is reported balance sheet
Cost of Goods Sold: The expense on the income statement for the cost of the product that is sold
Calculating Cost of Goods Sold for the Income Statement:
Beginning Finished Goods Inventory
+ Cost of goods manufactured
= Goods Available for Sale
– Ending Finished Goods Inventory
= Cost of Goods Sold
Prepare the full income statement:
– Cost of Goods Sold
= Gross Profit
– Operating (period) expenses
= Operating Income
INVENTORY COSTS FOR A MANUFACTURING COMPANY:
Raw Materials – materials that will go into the product
Work in Process – add materials, labor and overhead and make the product
Finished Goods – complete products in the warehouse until sold
The cost becomes “Cost of Goods Sold” on the income statement