- Explain and show the Schedule of Cost of Goods Manufactured - Explain and show the Schedule of Cost of Goods Sold - Explain and show the Income statement [SLIDE 1] The Schedule of Cost of Goods Manufactured contains three elements of product costs.
  1. Direct Materials
  2. Direct Labor
  3. Manufacturing overhead
This schedule summarizes the transactions that have occurred in the product cost accounts for direct materials, direct labor and manufacturing overhead. It calculates the manufacturing costs associated with goods that were finished during the period. We will look at each section in greater detail in this lesson. [SLIDE 2] In preparing the schedule of cost of goods manufactured, we will begin with the direct materials section. In this section, we take the direct materials at the beginning of the period and add the purchases made during the period. This gives us the total direct materials available for use. We then deduct the direct materials remaining in inventory at the end of the period, which gives us the direct materials used in production for the period. We next need to deduct the indirect materials used in production that was included in manufacturing overhead for the period and we get the final amount of direct materials that was consumed during the production period. Remember, we removed direct materials that were not directly traceable to the product and applied them to manufacturing overhead when we removed them from inventory. The equation for this section is: Beginning direct/raw materials inventory + Purchases of direct/raw materials – Ending direct/raw materials inventory – Direct/raw materials applied to overhead = Direct/raw materials used in production Next, we will discuss the manufacturing cost section. [SLIDE 3] We have the direct materials amount for the period. The next section of the Schedule of Cost of Goods Manufactured is the manufacturing cost section. In this section, we take the total direct materials consumed in production and add the direct labor incurred during the period for production. We then add the manufacturing overhead that was applied during the period to production orders/work in process. The manufacturing overhead applied is also called conversion costs or costs to convert direct materials into finished goods. This calculation gives us the total manufacturing costs for the period. The equation for this section is: Direct/raw materials used in production + Direct Labor + Manufacturing overhead applied to production/work in process (conversion costs) = Total manufacturing costs Next, we will discuss the cost of goods manufactured section. [SLIDE 4] We have the total manufacturing costs for the period. The last section of the Schedule of Cost of Goods Manufactured is the calculation of the total cost for the goods that were completed to finished goods for the period. In this section, we take the total manufacturing costs for the period and add the beginning work in process inventory balance for the period. We then deduct the ending work in process inventory to arrive at the cost of goods manufactured for the period. The work in process is the production that has not been completed and transferred to finished goods. Keep in mind that we have accounted for the direct materials, direct labor and applied overhead for this incomplete production in our costs for materials, labor and overhead in the previous sections of the report. The equation for this section is: Total manufacturing costs + Beginning work in process inventory (units of production not completed at the beginning of the period) - Ending work in process inventory (units of production not completed at the end of the period) = Total cost of goods manufactured Next, we will discuss the cost of goods sold schedule. [SLIDE 5] The next schedule is the Cost of Goods Sold. This section is the cost for the finished goods/completed production sold or delivered to the customers during the period. We calculate this section by taking the beginning finished goods inventory for the period and adding the cost of goods manufactured that we calculated in the cost of goods manufactured section. This will give us the cost of goods available for sale to the customers. We then deduct the ending finished goods inventory that was not sold during the period and we get the unadjusted cost of goods sold for product that was delivered during the period. We next need to review the amount remaining in the manufacturing overhead account that has not been applied to production. Keep in mind that any remaining cost in the overhead account will need to be applied to the cost of production since we applied overhead at a predetermined rate calculated at the beginning of the period, which we estimated. Depending on whether this amount is positive (underapplied) or negative (overapplied), we will add underapplied overhead and deduct overapplied overhead to/from our unadjusted cost of goods sold amount to get the adjusted cost of goods sold for the income statement. The equation for this section is: Beginning Finished Goods Inventory + Cost of Goods Manufactured - Ending Finished Goods Inventory - or + Under or Over applied overhead = Adjusted Cost of Goods Sold Finally, we will discuss the Income Statement. [SLIDE 6] The Income Statement helps management to see how the company performed for the period. This statement is calculated by taking the total sales of production that was delivered to customers for the period and subtracts all the costs incurred for the period to arrive at a net income for the period. We calculate this by taking the sales for the period and deducting the cost of goods sold that we calculated in the schedule. This will give us the gross margin/income for the period for the products that were produced and sold during the period. We then deduct any selling and administrative costs for the period, which are not part of the production costs, and this gives us the net operating income or loss for the period. The equation for this statement is: Sales of finished product delivered to customers - Cost of Goods Sold = Gross Margin/Income - Selling and Administrative expenses (period costs not related to production costs) = Net income This helps management to understand how the company performed during the period in order to plan, control and make decisions regarding future production and performance of the company. We have looked at these statements based on a manufacturing company but service companies such as law firms, construction companies, and accounting firms, to name a few, can also use this same type of job-costing system.