Practice As You Learn

Cost of Goods Manufactured

The cost of goods manufactured consists of product costs: direct materials used, direct labor, and manufacturing overhead. After you have totaled these costs, consider the work in process at the beginning and the end of the period.

To calculate cost of goods manufactured, follow these steps in this order:

1^st – Determine raw materials used using this formula

Beginning Raw Materials Inventory
+ Purchases of Raw Materials
– Ending Raw Materials Inventory
=Materials Used in Production

2^nd – Look for and list all the direct labor costs. This will be all workers involved in assembling the product and those who operate the machines that make the product. (Do not include other types of labor)

3^rd – Look for and list all the manufacturing overhead costs. Look for the word “plant”, “factory”, “manufacturing” in the cost description.

If it occurs at the manufacturing plant and it is not direct material or direct labor, it is manufacturing overhead. Indirect labor and indirect materials are always manufacturing overhead.

4^th – Add beginning work in process and subtract ending work in process. Beginning is added because it is the first products to be completed this period and ending is subtracted because it is not yet finished.

5^th – Do not Include sales, general and administrative expenses, and selling expenses in cost of goods manufactured. They will be reported on the income statement as operating expenses.

Practice as You Learn – Problem 1.

Larkin Manufacturing Co. had the following data in their general ledger.

Sales 960
Purchase of raw materials 470
Plant manager’s salary 52
Direct labor – assembly 220
Insurance on manufacturing facility 12
Executive salaries 90
Selling Expenses 170
Utilities at the manufacturing facility 48
Raw materials, beginning 10
Machine operators – production line 80
Raw materials, ending 50
WIP – beginning 30
WIP – ending 60
FG – beginning 110
FG – ending 100

Follow the 5 steps above and calculate cost of goods manufactured:

Answer

1^st – Determine raw materials used using this formula

Beginning Raw Materials Inventory 10
+ Purchases of Raw Materials 470
– Ending Raw Materials Inventory (50)
= Materials Used in Production 430

Machine operators – production line 80
Direct labor – assembly 220
Total direct labor 300

3^rd – Look for and list all the manufacturing overhead costs. Look for the words “plant”, “factory”, “manufacturing” in the cost description. If it occurs at the manufacturing plant and it is not direct material or direct labor, it is manufacturing overhead. Indirect labor and indirect materials are always manufacturing overhead.

Plant manager’s salary 52
Insurance on manufacturing facility 12
Utilities at the manufacturing facility 48
Total manufacturing overhead 112

4^th – Add beginning work in process and subtract ending work in process.

5^th – Do not include sales, general and administrative expenses or selling expenses

Compute Cost of Goods Manufactured:

Beginning Raw Materials Inventory 10
+ Purchases of Raw Materials 470
– Ending Raw Materials Inventory (50)
= Materials Used in Production 430

Machine operators – production line 80
Direct labor – assembly 220
Total direct labor 300

Plant manager’s salary 52
Insurance on manufacturing facility 12
Utilities at the manufacturing facility 48
Total manufacturing overhead 112

+ Beginning WIP 30
– Ending WIP (60)

Cost of Goods Manufactured 812

Best Products had the following inventory balances:

	Beginning of Period	End of Period
Raw Materials	12,000	16,000
Work in Process	68,000	84,000
Finished Goods	32,000	24,000

During the period, raw materials purchased were $128,000, assembly workers were paid $162,000, production line machine operators were paid $92,000 and other costs were as follows: rent on the manufacturing plant $22,000, manufacturing supervisors salaries $19,000, utilities at the manufacturing plant $2,200, executive salaries $36,000, rent at corporate headquarters $14,000 and salesman travel expense $3,600. Sales for the period were $650,000.

Follow the 5 steps above and calculate cost of goods manufactured and prepare an income statement.

Answer

1^st – Determine raw materials used using this formula

Beginning Raw Materials Inventory 12,000
+ Purchases of Raw Materials 128,000
– Ending Raw Materials Inventory (16,000)
= Materials Used in Production 124,000

Production line machine operators    92,000
Assembly workers     162,000
Total direct labor   254,000

Rent on the manufacturing plant 22,000
Manufacturing supervisors’ salaries 19,000
Utilities at the manufacturing plant 2,200
Total manufacturing overhead 43,200

4^th – Add beginning work in process and subtract ending work in process. Ending is subtracted because it is not yet finished.

5^th – Do not include sales, general and administrative expenses or selling expenses in cost of goods manufactured. Show these as operating expenses on the income statement.

Cost of Goods Manufactured:

Beginning Raw Materials Inventory   12,000
+ Purchases of Raw Materials   128,000
– Ending Raw Materials Inventory    (16,000)
= Materials Used in Production   124,000

Production line machine operators 92,000
Assembly workers 162,000
Total direct labor 254,000

Rent on the manufacturing plant   22,000
Manufacturing supervisors salaries   19,000
Utilities at the manufacturing plant 2,200
Total manufacturing overhead    43,200

+ Beginning WIP 68,000
– Ending WIP (84,000)

Cost of Goods Manufactured 405,200

Cost of Goods sold is necessary for the income statement:

Beginning finished goods   32,000
+ Cost of goods manufactured 405,200
– Ending finished goods   (24,000)
= Cost of goods sold   413,200

Income Statement:

Sales 650,000
– Cost of goods sold   (413,200)
= Gross profit   236,800
– G& A expenses (50,000)
– selling expenses (3,600)
= Operating Income   183,200

Cost of Goods Manufactured