7.7: Cost of Goods Sold Budget

Last updated
Save as PDF

Page ID: 44247

$ \newcommand{\vecs}[1]{\overset { \scriptstyle \rightharpoonup} {\mathbf{#1}} } $ $ \newcommand{\vecd}[1]{\overset{-\!-\!\rightharpoonup}{\vphantom{a}\smash {#1}}} $$\newcommand{\id}{\mathrm{id}}$ $ \newcommand{\Span}{\mathrm{span}}$ $ \newcommand{\kernel}{\mathrm{null}\,}$ $ \newcommand{\range}{\mathrm{range}\,}$ $ \newcommand{\RealPart}{\mathrm{Re}}$ $ \newcommand{\ImaginaryPart}{\mathrm{Im}}$ $ \newcommand{\Argument}{\mathrm{Arg}}$ $ \newcommand{\norm}[1]{\| #1 \|}$ $ \newcommand{\inner}[2]{\langle #1, #2 \rangle}$ $ \newcommand{\Span}{\mathrm{span}}$ $\newcommand{\id}{\mathrm{id}}$ $ \newcommand{\Span}{\mathrm{span}}$ $ \newcommand{\kernel}{\mathrm{null}\,}$ $ \newcommand{\range}{\mathrm{range}\,}$ $ \newcommand{\RealPart}{\mathrm{Re}}$ $ \newcommand{\ImaginaryPart}{\mathrm{Im}}$ $ \newcommand{\Argument}{\mathrm{Arg}}$ $ \newcommand{\norm}[1]{\| #1 \|}$ $ \newcommand{\inner}[2]{\langle #1, #2 \rangle}$ $ \newcommand{\Span}{\mathrm{span}}$$\newcommand{\AA}{\unicode[.8,0]{x212B}}$

Both cost of goods sold budgets that follow include beginning and ending work in process and beginning and ending finished goods amounts. The calculations begin with what was available at the beginning of the period, add what was transferred in during the period, and deduct what was remaining at the end of the period to determine what was transferred out. A transfer out from finished goods, of course, indicates a sale and a move to cost of goods sold.

The cost of goods sold budgets for both companies follow. Direct materials, direct labor, and factory overhead amounts are taken from their respective supporting budgets prepared previously.

**Souvenir Statues**
**Cost of Goods Sold Budget**
Finished good inventory, January 1						$36,700
$\ \quad \quad$Work in process inventory, January 1				$25,100
$\ \quad \quad\quad \quad$Direct materials		$51,600
$\ \quad \quad\quad \quad$Direct labor	+	50,000
$\ \quad \quad\quad \quad$Factory overload	+	12,000
$\ \quad \quad$Total manufacturing costs for the year			=	113,600
$\ \quad \quad$Total work in process during the year			+	$138,700
$\ \quad \quad$Work in process inventory, December 31			-	(3,100)
Cost of goods manufactured					=	135,600
Cost of finished goods available for sale					=	$172,300
Finished goods inventory, December 31					-	(9,400)
Cost of goods sold					=	$162,900

**Headgear**
**Cost of Goods Sold Budget**
Finished good inventory, January 1						$33,040
$\ \quad \quad$Work in process inventory, January 1				$43,150
$\ \quad \quad\quad \quad$Direct materials		$46,208
$\ \quad \quad\quad \quad$Direct labor	+	124,032
$\ \quad \quad\quad \quad$Factory overload	+	73,000
$\ \quad \quad$Total manufacturing costs for the year			=	243,240
$\ \quad \quad$Total work in process during the year			+	$286,390
$\ \quad \quad$Work in process inventory, December 31			-	(26,100)
Cost of goods manufactured					=	$260,290
Cost of finished goods available for sale					=	293,330
Finished goods inventory, December 31					-	(29,790)
Cost of goods sold					=	$263,540

The first step on the cost of goods sold budget is to list and total the three manufacturing costs: direct materials, direct labor, and factory overhead. Their amounts are taken from their respective cost budgets and appear in the left column. Total manufacturing costs for the year is the sum of the three, entered in the middle column.

Next, the manufacturing costs for the year are added to the work in process at the beginning of the year to arrive at the available total work in process for the year. From that result, the ending work in process - the product that is still unfinished - is deducted to determine the cost of goods manufactured.

Finally, the cost of goods manufactured is added to the finished goods at the beginning of the year to arrive at the cost of finished goods available for sale. From that result, the finished goods that were not sold are deducted to arrive at the cost of goods that were sold.

The following table shows the calculations for the work in process and finished goods amounts for the headgear manufacturing company. This level of detail is not necessary to show in the statement of cost of goods manufactured, but it is useful in understanding how amounts in that statement were derived.

CALCULATIONS - Cost of Goods Sold Budget
	Units	Cost/Unit
Finished goods inventory, January 1:
$\ \quad \quad$Bicycle helmet	110	x	$24	=	$2,640
$\ \quad \quad$Ski helmet	320	x	95	=	30,400
$\ \quad \quad\quad \quad$Total beginning inventory						$33,040
Work in process inventory, January:
$\ \quad \quad$Bicycle helmet	450	x	$15	=	$6,750
$\ \quad \quad$Skit helmet	520	x	70	=	36,400
$\ \quad \quad\quad \quad$Total beginning work in process						$43,150
Work in process inventory, December 31:
$\ \quad \quad$Bicycle helmet	610	x	$10	=	$6,100
$\ \quad \quad$Ski helmet	500	x	40	=	20,000
$\ \quad \quad\quad \quad$Total ending work in process						$26,100
Finished goods inventory, December 31:
$\ \quad \quad$Bicycle helmet	150	x	$25	=	$3,750
$\ \quad \quad$Ski helmet	280	x	93	=	26,040	$29,790
$\ \quad \quad\quad \quad$Total ending inventory

The sales and cost of goods sold budgets provide key information necessary to arrive at the budgeted gross profit amount.

Finished good inventory, January 1						$36,700
\(\ \quad \quad\)Work in process inventory, January 1				$25,100
\(\ \quad \quad\quad \quad\)Direct materials		$51,600
\(\ \quad \quad\quad \quad\)Direct labor	+	50,000
\(\ \quad \quad\quad \quad\)Factory overload	+	12,000
\(\ \quad \quad\)Total manufacturing costs for the year			=	113,600
\(\ \quad \quad\)Total work in process during the year			+	$138,700
\(\ \quad \quad\)Work in process inventory, December 31			-	(3,100)
Cost of goods manufactured					=	135,600
Cost of finished goods available for sale					=	$172,300
Finished goods inventory, December 31					-	(9,400)
Cost of goods sold					=	$162,900