{"id":62,"date":"2021-01-26T21:55:07","date_gmt":"2021-01-26T21:55:07","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/?post_type=chapter&#038;p=62"},"modified":"2021-08-15T21:01:59","modified_gmt":"2021-08-15T21:01:59","slug":"cost-of-goods-manufactured","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/chapter\/cost-of-goods-manufactured\/","title":{"raw":"Cost of Goods Manufactured","rendered":"Cost of Goods Manufactured"},"content":{"raw":"<div class=\"textbox learning-objectives\">\r\n<h3>Learning Outcomes<\/h3>\r\n<ul>\r\n \t<li>Describe the flow of costs for a manufacturing company<\/li>\r\n<\/ul>\r\n<\/div>\r\nA manufacturing company has three general categories of inventory:\r\n<ul>\r\n \t<li style=\"font-weight: 400;\" aria-level=\"1\">Raw materials<\/li>\r\n \t<li style=\"font-weight: 400;\" aria-level=\"1\">Work in process<\/li>\r\n \t<li style=\"font-weight: 400;\" aria-level=\"1\">Finished Goods<\/li>\r\n<\/ul>\r\n<strong>Raw materials<\/strong> consist of both direct materials and indirect materials.\r\n\r\n<strong>Work in process<\/strong>\u00a0(WIP) are products that are not yet ready for sale.\r\n\r\n<strong>Finished goods<\/strong> are products that are completely done and ready to go out the door.\r\n\r\nLet's look at an example.\r\n\r\nClockCo makes clocks. The gears and casings they buy from their supplier are the direct raw materials the employees will convert into clocks. Each clock gets a certain number of gears and one case. However, the paint the company purchases in 5-gallon buckets are spread out over a number of clocks and can\u2019t be traced to any one particular clock (cost object), and paint is treated as indirect materials and therefore is part of <strong>manufacturing overhead (MOH)<\/strong>.\r\n\r\nRemember that manufacturing overhead is anything that can\u2019t be directly assigned to a specific product.\r\n\r\n<img class=\"aligncenter wp-image-487 size-full\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5469\/2021\/01\/06002543\/Slide1.jpeg\" alt=\"Two images. The first image shows gears and states &quot;Purchase direct raw materials (parts used in production). The second image shows a splatter of paint and says &quot;Purchase indirect raw materials (paint)&quot;.\" width=\"720\" height=\"405\" \/>\r\n\r\nAssuming ClockCo has no clocks in production yet, the company only has raw materials inventory. However, as the company moves gears into the production line and starts painting, raw materials inventory is reduced, and a new category of inventory called Work in Process arises.\r\n\r\n<img class=\"aligncenter wp-image-488 size-full\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5469\/2021\/01\/06002728\/Slide2.jpeg\" alt=\"On the left is an area called Raw Materials with two images. The first image shows gears and states &quot;Use raw materials in production (gears)&quot;. The second image below that shows a splatter of paint and says &quot;Use indirect raw materials in production (paint)&quot;. To the right is an area called Work in Process with an image of the gears again labeled as &quot;Direct Materials&quot;. Below that is an image of the paint splatter again labeled &quot;Manufacturing Overhead&quot;.\" width=\"720\" height=\"405\" \/>\r\n\r\nWork in process also includes direct and indirect labor and other manufacturing overhead costs.\r\n\r\n<img class=\"aligncenter wp-image-489 size-full\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5469\/2021\/01\/06002828\/Slide3.jpeg\" alt=\"On the left is an area called Raw Materials with two images. The first image shows gears and states &quot;Use raw materials in production (gears)&quot;. The second image below that shows a splatter of paint and says &quot;Use indirect raw materials in production (paint)&quot;. To the right is an area called Work in Process with an image of the gears again labeled as &quot;Direct Materials&quot;. Below that is an image of people labeled &quot;Direct Labor&quot; and it says &quot;Add direct labor to convert raw materials to finished goods&quot;. Below that is an image of the paint splatter and people again labeled &quot;Manufacturing Overhead&quot; and it says &quot;Add indirect labor (production supervision) and indirect materials&quot;.\" width=\"720\" height=\"405\" \/>\r\n\r\nAs a clock is finished, all of the costs associated with building that clock (prime and conversion costs) are transferred to an inventory account called Finished Goods.\r\n\r\n<img class=\"aligncenter wp-image-490 size-full\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5469\/2021\/01\/06002856\/Slide4.jpeg\" alt=\"On the left is an area called Raw Materials with two images. The first image shows gears and states &quot;Use raw materials in production (gears)&quot;. The second image below that shows a splatter of paint and says &quot;Use indirect raw materials in production (paint)&quot;. To the right is an area called Work in Process with an image of the gears again that says \u201cNeeds more direct materials (prime cost)\u201d. Below that is an image a person that says \u201cNeeds more direct labor (prime and conversion). Below that is an image of the paint splatter and person again. To the right is an area called Finished Goods. This area has images of gears, paint splatters, and people and states \u201cAllocate manufacturing overhead to finished product - total cost = DM + DL + MOH\u201d.\" width=\"720\" height=\"405\" \/>\r\n\r\n<strong>Cost of goods manufactured<\/strong> is the total of all the raw materials, direct labor, and allocated manufacturing overhead used during the period to create completed products.\r\n\r\nDetermine transfers from Raw Materials to Work in Process and from Work in Process to Finished Goods inventory accounts according to this formula:\r\n<p style=\"text-align: center;\">Beginning inventory balance + additions during the month \u2013 ending inventory balance = transfers out.<\/p>\r\n\r\n<h2>Raw Materials<\/h2>\r\nFor instance, assume ABC Manufacturing Company had $12,000 in raw materials at the beginning of July, determined by taking a physical count at the end of June and assigning costs to the items.\r\n\r\nDuring the month, the company bought $160,000 of raw materials. We\u2019ll assume for this example that all raw materials are direct materials, just to simplify the calculations.\r\n\r\nRaw materials available for use during the month were $172,000 (12,000+160,000). At the end of the month, a physical count established that the cost of ending raw materials inventory was $5,000. Therefore, raw materials used up during the month (transferred to Work in Process) was $167,000 (172,000 - 5,000).\r\n<div align=\"left\">\r\n<table class=\"fin-table gridded\">\r\n<thead>\r\n<tr class=\"u-sr-only\">\r\n<th scope=\"col\">Description<\/th>\r\n<th scope=\"col\">Amount<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td>Direct Materials Used:<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Beginning Direct Materials<\/td>\r\n<td class=\"r\">$\u00a0 12,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Purchases of Direct Materials (including Freight In)<\/td>\r\n<td class=\"r\">160,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Direct Materials Available for Use<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>172,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Ending Direct Materials<\/td>\r\n<td class=\"r\">$ (5,000)<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Direct Materials Used<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>$ 167,000<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n<h2>Work in Process<\/h2>\r\nAssume ABC incurred $88,000 in direct labor and $90,000 in manufacturing overhead. Total costs incurred in the manufacturing process would then be $345,000 as shown below.\r\n<div align=\"left\">\r\n<table class=\"fin-table gridded\">\r\n<thead>\r\n<tr class=\"u-sr-only\">\r\n<th scope=\"col\">Description<\/th>\r\n<th scope=\"col\">Amount<\/th>\r\n<th scope=\"col\">Total<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td>Direct Materials Used<\/td>\r\n<td class=\"r\">$ 167,000<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Direct Labor<\/td>\r\n<td class=\"r\">$\u00a0 88,000<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Manufacturing Overhead<\/td>\r\n<td class=\"r\">$\u00a0 90,000<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Total Manufacturing Costs Incurred during the Year<\/td>\r\n<td class=\"line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\r\n<td class=\"r\">$ 345,000<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n&nbsp;\r\n\r\nThe total manufacturing costs we need to account for include the $345,000\u00a0costs in July, plus work in process from June. Let\u2019s assume that amount was $66,000. Most likely, those products were finished in July (although that\u2019s not necessarily true). In any case, for July, we have the $66,000 in work in process carried forward plus $345,000 in new costs for a total of $411,000.\r\n<div align=\"left\">\r\n<table class=\"fin-table gridded\">\r\n<thead>\r\n<tr class=\"u-sr-only\">\r\n<th scope=\"col\">Description<\/th>\r\n<th scope=\"col\">Amount<\/th>\r\n<th scope=\"col\">Total<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td>Beginning Work-in-Process Inventory<\/td>\r\n<td><\/td>\r\n<td class=\"r\">$\u00a0 66,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Direct Materials Used:<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Beginning Direct Materials<\/td>\r\n<td class=\"r\">$\u00a0 12,000<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Purchases of Direct Materials (including Freight In)<\/td>\r\n<td class=\"r\">160,000<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Direct Materials Available for Use<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>172,000<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Ending Direct Materials<\/td>\r\n<td class=\"r\">$ (5,000)<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Direct Materials Used<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>$ 167,000<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Direct Labor<\/td>\r\n<td class=\"r\">$\u00a0 88,000<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Manufacturing Overhead<\/td>\r\n<td class=\"r\">$\u00a0 90,000<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Total Manufacturing Costs Incurred during the Year<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\r\n<td class=\"r\">$ 345,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Total Manufacturing Costs to Account For<\/td>\r\n<td><\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>$ 411,000<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n&nbsp;\r\n\r\nIt\u2019s likely at this point that, based on a physical count, we know either:\r\n<ol>\r\n \t<li style=\"font-weight: 400;\" aria-level=\"1\">Cost of ending work in process, or<\/li>\r\n \t<li style=\"font-weight: 400;\" aria-level=\"1\">Cost of goods manufactured (completed and ready to be sold).<\/li>\r\n<\/ol>\r\nIn this managerial accounting course, you\u2019ll be learning how to calculate those amounts using either job costing or process costing, but for now, let\u2019s assume we know the cost of goods manufactured is $395,000. For instance, we could have calculated that our cost per unit, taking into account direct materials, direct labor, and allocated manufacturing overhead, is $395, and we manufacture 1,000 completed units. Therefore, the cost of items sitting in work in process\u2014started but not yet completed\u2014is $16,000 (411,000 - 395,000).\r\n\r\nNow we can complete the schedule of cost of goods manufactured.\r\n<div align=\"left\">\r\n<table class=\"fin-table gridded\"><caption>ABC Manufacturing Company\r\nSchedule of Cost of Goods Manufactured\r\nMonth Ended July 31, 2021<\/caption>\r\n<thead>\r\n<tr class=\"u-sr-only\">\r\n<th scope=\"col\">Description<\/th>\r\n<th scope=\"col\">Amount<\/th>\r\n<th scope=\"col\">Total<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td>Beginning Work-in-Process Inventory<\/td>\r\n<td><\/td>\r\n<td class=\"r\">$\u00a0 66,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Direct Materials Used:<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Beginning Direct Materials<\/td>\r\n<td class=\"r\">$\u00a0 12,000<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Purchases of Direct Materials (including Freight In)<\/td>\r\n<td class=\"r\">160,000<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Direct Materials Available for Use<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>172,000<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Ending Direct Materials<\/td>\r\n<td class=\"r\">$ (5,000)<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Direct Materials Used<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>$ 167,000<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Direct Labor<\/td>\r\n<td class=\"r\">$\u00a0 88,000<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Manufacturing Overhead<\/td>\r\n<td class=\"r\">$\u00a0 90,000<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Total Manufacturing Costs Incurred during the Year<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\r\n<td class=\"r\">$ 345,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Total Manufacturing Costs to Account For<\/td>\r\n<td><\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>$ 411,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Ending Work-in-Process Inventory<\/td>\r\n<td><\/td>\r\n<td class=\"r\">(16,000)<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Cost of Goods Manufactured<\/td>\r\n<td><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$ 395,000<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n&nbsp;\r\n\r\nHere is a video review of how to complete a schedule of cost of goods manufactured.\r\n\r\n<iframe src=\"\/\/plugin.3playmedia.com\/show?mf=6352518&amp;p3sdk_version=1.10.1&amp;p=20361&amp;pt=375&amp;video_id=Ycezt5Hu06M&amp;video_target=tpm-plugin-i2v7aryi-Ycezt5Hu06M\" width=\"800px\" height=\"450px\" frameborder=\"0\" marginwidth=\"0px\" marginheight=\"0px\"><\/iframe>\r\n\r\nYou can view the <a href=\"https:\/\/oerfiles.s3.us-west-2.amazonaws.com\/Managerial+Accounting\/Transcripts\/HowToPrepareACostOfGoodsManufacturedStatement_transcript.txt\" target=\"_blank\" rel=\"noopener\">transcript for \"How to Prepare a Cost of Goods Manufactured Statement (Cost Accounting Tutorial #24)\" here (opens in new window)<\/a>.\r\n\r\nIn the next section, we\u2019ll see how the cost of goods sold flows to the income statement, but first, let\u2019s review cost of goods manufactured.\r\n\r\n<img class=\"alignnone wp-image-670\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5469\/2021\/01\/11185852\/1.3.1-Cost-of-Goods-Manufactured1-300x141.png\" alt=\"Flow chart for balance sheet and income statement that summarizes the work flow\" width=\"719\" height=\"338\" \/>\r\n\r\n&nbsp;\r\n<div align=\"left\">\r\n<table class=\"fin-table gridded\">\r\n<thead>\r\n<tr class=\"u-sr-only\">\r\n<th scope=\"col\">Description<\/th>\r\n<th scope=\"col\">Equation<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td style=\"font-weight: bold;\">Direct Materials Used<\/td>\r\n<td>Beginning Raw Materials Inventory + Raw Material Purchases \u2013 Ending Raw Materials Inventory \u2013 Indirect Materials Used<\/td>\r\n<\/tr>\r\n<tr>\r\n<td style=\"font-weight: bold;\">Total Manufacturing Cost<\/td>\r\n<td>Direct Materials + Direct Labor + Overhead applied<\/td>\r\n<\/tr>\r\n<tr>\r\n<td style=\"font-weight: bold;\">Cost of Goods Manufactured<\/td>\r\n<td>Total Manufacturing Cost (Direct Materials + Direct Labor + Overhead applied) + Beginning Work In Process Inventory \u2013 Ending Work in Process Inventory<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n&nbsp;\r\n\r\nNow, check your understanding of the flow of costs in a manufacturing environment:\r\n<div class=\"textbox tryit\">\r\n<h3>Practice Question<\/h3>\r\n[ohm_question hide_question_numbers=1]217913[\/ohm_question]\r\n\r\n<\/div>","rendered":"<div class=\"textbox learning-objectives\">\n<h3>Learning Outcomes<\/h3>\n<ul>\n<li>Describe the flow of costs for a manufacturing company<\/li>\n<\/ul>\n<\/div>\n<p>A manufacturing company has three general categories of inventory:<\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\">Raw materials<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\">Work in process<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\">Finished Goods<\/li>\n<\/ul>\n<p><strong>Raw materials<\/strong> consist of both direct materials and indirect materials.<\/p>\n<p><strong>Work in process<\/strong>\u00a0(WIP) are products that are not yet ready for sale.<\/p>\n<p><strong>Finished goods<\/strong> are products that are completely done and ready to go out the door.<\/p>\n<p>Let&#8217;s look at an example.<\/p>\n<p>ClockCo makes clocks. The gears and casings they buy from their supplier are the direct raw materials the employees will convert into clocks. Each clock gets a certain number of gears and one case. However, the paint the company purchases in 5-gallon buckets are spread out over a number of clocks and can\u2019t be traced to any one particular clock (cost object), and paint is treated as indirect materials and therefore is part of <strong>manufacturing overhead (MOH)<\/strong>.<\/p>\n<p>Remember that manufacturing overhead is anything that can\u2019t be directly assigned to a specific product.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-487 size-full\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5469\/2021\/01\/06002543\/Slide1.jpeg\" alt=\"Two images. The first image shows gears and states &quot;Purchase direct raw materials (parts used in production). The second image shows a splatter of paint and says &quot;Purchase indirect raw materials (paint)&quot;.\" width=\"720\" height=\"405\" \/><\/p>\n<p>Assuming ClockCo has no clocks in production yet, the company only has raw materials inventory. However, as the company moves gears into the production line and starts painting, raw materials inventory is reduced, and a new category of inventory called Work in Process arises.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-488 size-full\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5469\/2021\/01\/06002728\/Slide2.jpeg\" alt=\"On the left is an area called Raw Materials with two images. The first image shows gears and states &quot;Use raw materials in production (gears)&quot;. The second image below that shows a splatter of paint and says &quot;Use indirect raw materials in production (paint)&quot;. To the right is an area called Work in Process with an image of the gears again labeled as &quot;Direct Materials&quot;. Below that is an image of the paint splatter again labeled &quot;Manufacturing Overhead&quot;.\" width=\"720\" height=\"405\" \/><\/p>\n<p>Work in process also includes direct and indirect labor and other manufacturing overhead costs.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-489 size-full\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5469\/2021\/01\/06002828\/Slide3.jpeg\" alt=\"On the left is an area called Raw Materials with two images. The first image shows gears and states &quot;Use raw materials in production (gears)&quot;. The second image below that shows a splatter of paint and says &quot;Use indirect raw materials in production (paint)&quot;. To the right is an area called Work in Process with an image of the gears again labeled as &quot;Direct Materials&quot;. Below that is an image of people labeled &quot;Direct Labor&quot; and it says &quot;Add direct labor to convert raw materials to finished goods&quot;. Below that is an image of the paint splatter and people again labeled &quot;Manufacturing Overhead&quot; and it says &quot;Add indirect labor (production supervision) and indirect materials&quot;.\" width=\"720\" height=\"405\" \/><\/p>\n<p>As a clock is finished, all of the costs associated with building that clock (prime and conversion costs) are transferred to an inventory account called Finished Goods.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-490 size-full\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5469\/2021\/01\/06002856\/Slide4.jpeg\" alt=\"On the left is an area called Raw Materials with two images. The first image shows gears and states &quot;Use raw materials in production (gears)&quot;. The second image below that shows a splatter of paint and says &quot;Use indirect raw materials in production (paint)&quot;. To the right is an area called Work in Process with an image of the gears again that says \u201cNeeds more direct materials (prime cost)\u201d. Below that is an image a person that says \u201cNeeds more direct labor (prime and conversion). Below that is an image of the paint splatter and person again. To the right is an area called Finished Goods. This area has images of gears, paint splatters, and people and states \u201cAllocate manufacturing overhead to finished product - total cost = DM + DL + MOH\u201d.\" width=\"720\" height=\"405\" \/><\/p>\n<p><strong>Cost of goods manufactured<\/strong> is the total of all the raw materials, direct labor, and allocated manufacturing overhead used during the period to create completed products.<\/p>\n<p>Determine transfers from Raw Materials to Work in Process and from Work in Process to Finished Goods inventory accounts according to this formula:<\/p>\n<p style=\"text-align: center;\">Beginning inventory balance + additions during the month \u2013 ending inventory balance = transfers out.<\/p>\n<h2>Raw Materials<\/h2>\n<p>For instance, assume ABC Manufacturing Company had $12,000 in raw materials at the beginning of July, determined by taking a physical count at the end of June and assigning costs to the items.<\/p>\n<p>During the month, the company bought $160,000 of raw materials. We\u2019ll assume for this example that all raw materials are direct materials, just to simplify the calculations.<\/p>\n<p>Raw materials available for use during the month were $172,000 (12,000+160,000). At the end of the month, a physical count established that the cost of ending raw materials inventory was $5,000. Therefore, raw materials used up during the month (transferred to Work in Process) was $167,000 (172,000 &#8211; 5,000).<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table gridded\">\n<thead>\n<tr class=\"u-sr-only\">\n<th scope=\"col\">Description<\/th>\n<th scope=\"col\">Amount<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>Direct Materials Used:<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Beginning Direct Materials<\/td>\n<td class=\"r\">$\u00a0 12,000<\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Purchases of Direct Materials (including Freight In)<\/td>\n<td class=\"r\">160,000<\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Direct Materials Available for Use<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>172,000<\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Ending Direct Materials<\/td>\n<td class=\"r\">$ (5,000)<\/td>\n<\/tr>\n<tr>\n<td>Direct Materials Used<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>$ 167,000<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<h2>Work in Process<\/h2>\n<p>Assume ABC incurred $88,000 in direct labor and $90,000 in manufacturing overhead. Total costs incurred in the manufacturing process would then be $345,000 as shown below.<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table gridded\">\n<thead>\n<tr class=\"u-sr-only\">\n<th scope=\"col\">Description<\/th>\n<th scope=\"col\">Amount<\/th>\n<th scope=\"col\">Total<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>Direct Materials Used<\/td>\n<td class=\"r\">$ 167,000<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Direct Labor<\/td>\n<td class=\"r\">$\u00a0 88,000<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Manufacturing Overhead<\/td>\n<td class=\"r\">$\u00a0 90,000<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Total Manufacturing Costs Incurred during the Year<\/td>\n<td class=\"line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\n<td class=\"r\">$ 345,000<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>&nbsp;<\/p>\n<p>The total manufacturing costs we need to account for include the $345,000\u00a0costs in July, plus work in process from June. Let\u2019s assume that amount was $66,000. Most likely, those products were finished in July (although that\u2019s not necessarily true). In any case, for July, we have the $66,000 in work in process carried forward plus $345,000 in new costs for a total of $411,000.<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table gridded\">\n<thead>\n<tr class=\"u-sr-only\">\n<th scope=\"col\">Description<\/th>\n<th scope=\"col\">Amount<\/th>\n<th scope=\"col\">Total<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>Beginning Work-in-Process Inventory<\/td>\n<td><\/td>\n<td class=\"r\">$\u00a0 66,000<\/td>\n<\/tr>\n<tr>\n<td>Direct Materials Used:<\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Beginning Direct Materials<\/td>\n<td class=\"r\">$\u00a0 12,000<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Purchases of Direct Materials (including Freight In)<\/td>\n<td class=\"r\">160,000<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Direct Materials Available for Use<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>172,000<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Ending Direct Materials<\/td>\n<td class=\"r\">$ (5,000)<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Direct Materials Used<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>$ 167,000<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Direct Labor<\/td>\n<td class=\"r\">$\u00a0 88,000<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Manufacturing Overhead<\/td>\n<td class=\"r\">$\u00a0 90,000<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Total Manufacturing Costs Incurred during the Year<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\n<td class=\"r\">$ 345,000<\/td>\n<\/tr>\n<tr>\n<td>Total Manufacturing Costs to Account For<\/td>\n<td><\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>$ 411,000<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>&nbsp;<\/p>\n<p>It\u2019s likely at this point that, based on a physical count, we know either:<\/p>\n<ol>\n<li style=\"font-weight: 400;\" aria-level=\"1\">Cost of ending work in process, or<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\">Cost of goods manufactured (completed and ready to be sold).<\/li>\n<\/ol>\n<p>In this managerial accounting course, you\u2019ll be learning how to calculate those amounts using either job costing or process costing, but for now, let\u2019s assume we know the cost of goods manufactured is $395,000. For instance, we could have calculated that our cost per unit, taking into account direct materials, direct labor, and allocated manufacturing overhead, is $395, and we manufacture 1,000 completed units. Therefore, the cost of items sitting in work in process\u2014started but not yet completed\u2014is $16,000 (411,000 &#8211; 395,000).<\/p>\n<p>Now we can complete the schedule of cost of goods manufactured.<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table gridded\">\n<caption>ABC Manufacturing Company<br \/>\nSchedule of Cost of Goods Manufactured<br \/>\nMonth Ended July 31, 2021<\/caption>\n<thead>\n<tr class=\"u-sr-only\">\n<th scope=\"col\">Description<\/th>\n<th scope=\"col\">Amount<\/th>\n<th scope=\"col\">Total<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>Beginning Work-in-Process Inventory<\/td>\n<td><\/td>\n<td class=\"r\">$\u00a0 66,000<\/td>\n<\/tr>\n<tr>\n<td>Direct Materials Used:<\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Beginning Direct Materials<\/td>\n<td class=\"r\">$\u00a0 12,000<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Purchases of Direct Materials (including Freight In)<\/td>\n<td class=\"r\">160,000<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Direct Materials Available for Use<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>172,000<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Ending Direct Materials<\/td>\n<td class=\"r\">$ (5,000)<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Direct Materials Used<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>$ 167,000<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Direct Labor<\/td>\n<td class=\"r\">$\u00a0 88,000<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Manufacturing Overhead<\/td>\n<td class=\"r\">$\u00a0 90,000<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Total Manufacturing Costs Incurred during the Year<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\n<td class=\"r\">$ 345,000<\/td>\n<\/tr>\n<tr>\n<td>Total Manufacturing Costs to Account For<\/td>\n<td><\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>$ 411,000<\/td>\n<\/tr>\n<tr>\n<td>Ending Work-in-Process Inventory<\/td>\n<td><\/td>\n<td class=\"r\">(16,000)<\/td>\n<\/tr>\n<tr>\n<td>Cost of Goods Manufactured<\/td>\n<td><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$ 395,000<span class=\"u-sr-only\">Double line<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>&nbsp;<\/p>\n<p>Here is a video review of how to complete a schedule of cost of goods manufactured.<\/p>\n<p><iframe loading=\"lazy\" src=\"\/\/plugin.3playmedia.com\/show?mf=6352518&amp;p3sdk_version=1.10.1&amp;p=20361&amp;pt=375&amp;video_id=Ycezt5Hu06M&amp;video_target=tpm-plugin-i2v7aryi-Ycezt5Hu06M\" width=\"800px\" height=\"450px\" frameborder=\"0\" marginwidth=\"0px\" marginheight=\"0px\"><\/iframe><\/p>\n<p>You can view the <a href=\"https:\/\/oerfiles.s3.us-west-2.amazonaws.com\/Managerial+Accounting\/Transcripts\/HowToPrepareACostOfGoodsManufacturedStatement_transcript.txt\" target=\"_blank\" rel=\"noopener\">transcript for &#8220;How to Prepare a Cost of Goods Manufactured Statement (Cost Accounting Tutorial #24)&#8221; here (opens in new window)<\/a>.<\/p>\n<p>In the next section, we\u2019ll see how the cost of goods sold flows to the income statement, but first, let\u2019s review cost of goods manufactured.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-670\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5469\/2021\/01\/11185852\/1.3.1-Cost-of-Goods-Manufactured1-300x141.png\" alt=\"Flow chart for balance sheet and income statement that summarizes the work flow\" width=\"719\" height=\"338\" \/><\/p>\n<p>&nbsp;<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table gridded\">\n<thead>\n<tr class=\"u-sr-only\">\n<th scope=\"col\">Description<\/th>\n<th scope=\"col\">Equation<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td style=\"font-weight: bold;\">Direct Materials Used<\/td>\n<td>Beginning Raw Materials Inventory + Raw Material Purchases \u2013 Ending Raw Materials Inventory \u2013 Indirect Materials Used<\/td>\n<\/tr>\n<tr>\n<td style=\"font-weight: bold;\">Total Manufacturing Cost<\/td>\n<td>Direct Materials + Direct Labor + Overhead applied<\/td>\n<\/tr>\n<tr>\n<td style=\"font-weight: bold;\">Cost of Goods Manufactured<\/td>\n<td>Total Manufacturing Cost (Direct Materials + Direct Labor + Overhead applied) + Beginning Work In Process Inventory \u2013 Ending Work in Process Inventory<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>&nbsp;<\/p>\n<p>Now, check your understanding of the flow of costs in a manufacturing environment:<\/p>\n<div class=\"textbox tryit\">\n<h3>Practice Question<\/h3>\n<p><iframe loading=\"lazy\" id=\"ohm217913\" class=\"resizable\" src=\"https:\/\/ohm.lumenlearning.com\/multiembedq.php?id=217913&theme=oea&iframe_resize_id=ohm217913\" width=\"100%\" height=\"150\"><\/iframe><\/p>\n<\/div>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-62\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Original<\/div><ul class=\"citation-list\"><li>Cost of Goods Manufactured. <strong>Authored by<\/strong>: Joseph Cooke. <strong>Provided by<\/strong>: Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Shared previously<\/div><ul class=\"citation-list\"><li>Accounting Principles: A Business Perspective. <strong>Authored by<\/strong>: James Don Edwards, University of Georgia &amp; Roger H. Hermanson, Georgie State University. <strong>Provided by<\/strong>: Endeavour International Corporation. <strong>Project<\/strong>: The Global Text Project. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><li>Principles of Managerial Accounting. <strong>Authored by<\/strong>: Christine Jonick. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/ung.edu\/university-press\/books\/managerial-accounting.php\">https:\/\/ung.edu\/university-press\/books\/managerial-accounting.php<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by-sa\/4.0\/\">CC BY-SA: Attribution-ShareAlike<\/a><\/em><\/li><\/ul><div class=\"license-attribution-dropdown-subheading\">All rights reserved content<\/div><ul class=\"citation-list\"><li>How to Prepare a Cost of Goods Manufactured Statement (Managerial Accounting Tutorial #24). <strong>Authored by<\/strong>: Note Pirate. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/youtu.be\/Ycezt5Hu06M\">https:\/\/youtu.be\/Ycezt5Hu06M<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><div class=\"license-attribution-dropdown-subheading\">Lumen Learning authored content<\/div><ul class=\"citation-list\"><li>Balance Sheet \/ Income Statement. <strong>Provided by<\/strong>: Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section>","protected":false},"author":364389,"menu_order":12,"template":"","meta":{"_candela_citation":"[{\"type\":\"original\",\"description\":\"Cost of Goods Manufactured\",\"author\":\"Joseph Cooke\",\"organization\":\"Lumen Learning\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"},{\"type\":\"cc\",\"description\":\"Accounting Principles: A Business Perspective\",\"author\":\"James Don Edwards, University of Georgia & Roger H. 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