7.7: Cost of Goods Sold Budget
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.
|
Finished good inventory, January 1 |
$36,700 |
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|
\(\ \quad \quad\)Work in process inventory, January 1 |
$25,100 |
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|
\(\ \quad \quad\quad \quad\)Direct materials |
$51,600 |
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|
\(\ \quad \quad\quad \quad\)Direct labor |
+ |
50,000 |
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|
\(\ \quad \quad\quad \quad\)Factory overload |
+ |
12,000 |
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|
\(\ \quad \quad\)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 |
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|
Cost of finished goods available for sale |
= |
$172,300 |
||||
|
Finished goods inventory, December 31 |
- |
(9,400) |
||||
|
Cost of goods sold |
= |
$162,900 |
|
Finished good inventory, January 1 |
$33,040 |
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|
\(\ \quad \quad\)Work in process inventory, January 1 |
$43,150 |
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|
\(\ \quad \quad\quad \quad\)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.
|
Units |
Cost/Unit |
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|
Finished goods inventory, January 1: |
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|
\(\ \quad \quad\)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 |
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|
Work in process inventory, January: |
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|
\(\ \quad \quad\)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 |
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|
Work in process inventory, December 31: |
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|
\(\ \quad \quad\)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.