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Practice As You Learn

Medium Practice Test

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:

1st – Determine raw materials used using this formula

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

2nd – 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)

3rd – 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.

4th – 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.

5th – 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:

1st – 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

2nd – 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)

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

3rd – 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

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

5th – 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

+ 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.

1st – 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

2nd – 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)

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

3rd – 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.

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

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

5th – 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

+ 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