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1.6: The Statement of Cost of Goods Manufactured

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  • The statement of cost of goods manufactured supports the cost of goods sold figure on the income statement.  The two most important numbers on this statement are the total manufacturing cost and the cost of goods manufactured. Be careful not to confuse the terms total manufacturing cost and cost of goods manufactured with each other or with the cost of goods sold.

    Total Manufacturing Cost includes the costs of all resources put into production during the period (meaning, the direct materials, direct labor and overhead applied). Cost of goods manufactured consists of the cost of all goods completed during the period. It includes total manufacturing costs plus the beginning work in process inventory minus the ending work in process inventory. Cost of goods sold are the costs of all goods SOLD during the period and includes the cost of goods manufactured plus the beginning finished goods inventory minus the ending finished goods inventory.  Cost of goods sold is reported as an expense on the income statements and is the only time product costs are expensed.  This chart will summarize the formulas you will need:

    Direct Materials Used Beginning Raw Materials Inventory + Raw Material Purchases – Ending Raw Materials Inventory – Indirect Materials Used
    Total Manufacturing Cost Direct Materials + Direct Labor + Overhead applied
    Cost of Goods Manufactured Total Manufacturing Cost (Direct Materials + Direct Labor + Overhead applied) + Beginning Work In Process Inventory – Ending Work in Process Inventory
    Cost of Goods Sold Beginning Finished Goods Inventory + Cost of Goods Manufactured – Ending Finished Goods Inventory



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    NoteLook at the following example.  Farside Manufacturing makes calendars and books.  The schedule (or statement) of cost of goods manufactured follows:

    Farside Manufacturing Company  
    Statement of cost of goods manufactured  
    For the year ended December 31  
    Direct Materials Used:
      Raw Materials inventory, January 1 $40,000
      Raw Materials purchases 480,000
      Less: Raw Materials inventory, December 31 30,000
      Raw Materials used $490,000
    Less: Indirect Materials Used $0
    Direct Materials Used $490,000
    Direct labor 380,000
    Manufacturing overhead:
      Indirect labor $120,000
      Maintenance and repairs expense 60,000
      Factory utilities expense 10,000
      Depreciation expense – factory building 20,000
      Depreciation expense – factory equipment 30,000
      Other expense – factory 20,000
        Total manufacturing overhead 260,000
    Total Manufacturing Cost   $1,130,000
      Add: Work in process inventory, January 1 30,000
      Less: Work in process inventory, December 31 -60,000
    Cost of goods manufactured   $1,100,000

    Note how the statement shows the costs incurred for direct materials, direct labor, and manufacturing overhead. The statement totals these three costs for total manufacturing cost during the period. When adding beginning work in process inventory and deducting ending work in process inventory from the total manufacturing cost, we obtain cost of goods manufactured or completed. Cost of goods sold does not appear on the cost of goods manufactured statement but on the income statement.

    To make the manufacturer’s income statement more understandable to readers of the financial statements, accountants do not show all of the details that appear in the cost of goods manufactured statement. Next, we show the income statement for Farside Manufacturing Company. Notice the relationship of the statement of cost of goods manufactured to the income statement.

    The cost of goods manufactured appears in the cost of goods sold section of the income statement. The cost of goods manufactured is in the same place that purchases would be presented on a merchandiser’s income statement. We add cost of goods manufactured to beginning finished goods inventory to derive cost of goods available for sale. This is similar to the merchandiser who presents purchases added to beginning merchandise to derive goods available for sale.

    Farside Manufacturing Company
    Income statement
    For the year ended December 31
    Sales $1,800,000
    Cost of goods sold:
      Finished goods inventory, January 1 $50,000
      Cost of goods manufactured 1,100,000
      Cost of goods available for sale $1,150,000
      Less: Finished goods inventory, December 31 60,000
      Cost of goods sold 1,090,000
      Gross margin (Sales – Cost of goods sold) $710,000
    Operating expenses:
      Selling expenses $300,000
      Administrative expenses 200,000
      Total operating expenses 500,000
      Income from operations $210,000

    Note: Cost of goods available for sale represents all items completed and read to sell during the period.  It is calculated as beginning finished goods inventory + cost of goods manufactured from the statement of cost of goods manufactured.  Income from operations is calculated as Gross Margin (also called Gross Profit) – total operating expenses.