{"id":60,"date":"2021-01-26T21:54:51","date_gmt":"2021-01-26T21:54:51","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/?post_type=chapter&p=60"},"modified":"2021-06-10T18:40:29","modified_gmt":"2021-06-10T18:40:29","slug":"introduction-to-manufacturing-costs","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/chapter\/introduction-to-manufacturing-costs\/","title":{"raw":"Introduction to Manufacturing Costs","rendered":"Introduction to Manufacturing Costs"},"content":{"raw":"

What you will learn to do: describe the flow of manufacturing costs<\/h2>\r\nA manufacturer reports its product costs as one of three types of inventory in the current assets section of its balance sheet, depending on stages of completion. Materials<\/strong> consist of items in inventory that have not yet been entered into production or used. Work-in-process<\/strong> includes manufactured products that have been started but are not yet completed. In other words, they are currently in production. Finally, finished goods<\/strong> are manufactured products that have been completed but not yet sold to customers.\r\n\r\nMany of you will work in manufacturing companies or provide services for them. Others will work in retail or service organizations that do business with manufacturers. This section will help you understand how manufacturing companies work and how to read both their internal and external financial statements.\r\n\r\nAssume you own a bicycle store and purchase bicycles and accessories to sell to customers. To determine your profitability, you would subtract the cost of bicycles and accessories from your gross sales as cost of goods sold. However, if you owned the manufacturing company that made the bicycles, you would base your cost of goods sold on the cost of manufacturing those bicycles. Accounting for manufacturing costs is more complex than accounting for costs of merchandise purchased that is ready for sale.\"Bicycle\r\n\r\nPerhaps the most important accounting difference between merchandisers and manufacturers relates to the differences in the nature of their activities. A merchandiser purchases finished goods ready to be sold. On the other hand, a manufacturer must purchase raw materials and use production equipment and employee labor to transform the raw materials into finished products.\r\n\r\nWhile a merchandiser has only one type of inventory\u2014merchandise available for sale\u2014a manufacturer has three types\u2014unprocessed materials, partially complete work in process, and ready-for-sale finished goods. Instead of one inventory account, three different inventory accounts are necessary to show the cost of inventory in various stages of production. Looking at Exhibit 2, you can see how the inventory cost flows differ between manufacturing and merchandising companies.\r\n\r\nWe compare a manufacturer\u2019s \u201ccost of goods sold\u201d section of the income statement to that same section of the merchandiser\u2019s income statement in the chart below. There are two major differences in these cost of goods sold sections: (1) goods ready to be sold are referred to as merchandise inventory by a merchandiser and finished goods inventory by a manufacturer, and (2) the net cost of purchases for a merchandiser is equivalent to the cost of goods manufactured by a manufacturer.\r\n
\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
Merchandiser<\/td>\r\n<\/td>\r\nManufacturer<\/td>\r\n<\/td>\r\n<\/tr>\r\n
Cost of goods sold:<\/td>\r\n<\/td>\r\nCost of goods sold:<\/td>\r\n<\/td>\r\n<\/tr>\r\n
Merchandise inventory, Beginning<\/td>\r\n$ 25,000<\/td>\r\nFinished goods inventory, Beginning<\/td>\r\n$ 50,000<\/td>\r\n<\/tr>\r\n
Net cost of purchases<\/td>\r\n165,000Double line<\/span><\/td>\r\nCost of goods manufactured<\/td>\r\n1,100,000Double line<\/span><\/td>\r\n<\/tr>\r\n
Cost of goods available for sale<\/td>\r\n$ 190,000<\/td>\r\nCost of goods available for sale<\/td>\r\n$1,150,000<\/td>\r\n<\/tr>\r\n
Merchandise inventory, Ending<\/td>\r\n30,000Double line<\/span><\/td>\r\nFinished goods inventory, Ending<\/td>\r\n60,000Double line<\/span><\/td>\r\n<\/tr>\r\n
Cost of goods sold<\/td>\r\n$ 160,000<\/td>\r\nCost of goods sold<\/td>\r\n$1,090,000<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n \r\n\r\nUnlike a merchandiser\u2019s balance sheet that reports a single inventory amount, the balance sheet for a manufacturer typically shows materials, work in process, and finished goods inventories separately. The video and chart will explain these concepts further.\r\n\r\n