These lectures covers the schedule of cost of goods manufactured and schedule of cost of Goods Sold including work in process inventory and finished goods.
Schedules of Cost of Goods Manufactured and Cost of Goods Sold
Cost of goods manufactured is the cost of goods finished and transferred out of the Work-in- Process Inventory account this period.
Note that the manufacturing company requires a two- part calculation for cost of goods sold: the first part combines the cost flows affecting the Work-in-Process Inventory account to determine the amount of cost of goods manufactured, that is, the cost of the goods finished and transferred out of Work-in-Process during this period. The second part combines the cost flows for the Finished Goods Inventory account to deter- mine the amount of the cost of the goods sold and operating income, assuming $50 of selling expense for the manufacturing firm and $40 of operating expense for the merchandising firm. Operating expenses for a merchandising company include all the nonproduct costs—facilities cost, advertising, staffing, and so on.
The schedule of cost of goods manufactured contains three elements of product costs—direct materials, direct labor, and manufacturing overhead—and it summarizes the portions of those costs that remain in ending Work in Process inventory and that are transferred out of Work in Process into Finished Goods. The schedule of cost of goods sold also contains three elements of product costs—direct materials, direct labor, and manufacturing overhead—and it summarizes the portions of those costs that remain in ending Finished Goods inventory and that are transferred out of Finished Goods into Cost of Goods Sold.
Perhaps the most important concept to understand in this chapter is the flow of costs for manufacturers. Raw materials purchased from suppliers are stored in raw materials inventory until requisitioned for use in production. Direct materials are added to work in process along with direct labor and applied overhead. Once units of production are complete, their manufacturing costs are transferred from Work in Process to Finished Goods. When units of production are sold their associated costs are transferred from Finished Goods to Cost of Goods Sold on the income statement. Selling and administrative expenses are not attached to units of production. Instead, they are recorded as expenses on the income statement as incurred.
Manufacturing overhead costs are applied to jobs using a predetermined overhead rate. Because the predetermined overhead rate is based on estimates, the actual overhead cost incurred during a period may be more or less than the amount of overhead cost applied to production. Such a difference is referred to as underapplied or overapplied overhead. The underapplied or overapplied overhead for a period can be either closed out to Cost of Goods Sold or closed proportionally to Work in Process, Finished Goods, and Cost of Goods Sold. When overhead is underapplied, manufacturing overhead costs have been understated and therefore inventories and/or cost of goods sold must be adjusted upwards. When overhead is overapplied, manufacturing overhead costs have been overstated and therefore inventories and/or cost of goods sold must be adjusted downward