Schedule of Cost of Goods Manufactured

The schedules of raw materials and work in process are often combined into a single schedule of cost of goods manufactured. This schedule contains no new information from that presented on the prior page; it is just a combination and slight rearrangement of the separate schedules.

KATRINA'S TRINKETS Schedule of Cost of Goods Manufactured For the Year Ending December 31, 20X6

Direct materials:

Beginning raw materials inventory, Jan. 1

$ 135,000

Plus: Net purchases of raw materials


Raw materials available

$ 755,000

Less: Ending raw materials inventory, Dec. 31


Raw materials transferred to production

$ 595,000

Direct labor


Factory overhead

Indirect materials

$ 15,000

Indirect labor


Factory utilities


Factory depreciation


Factory insurance, maintenance, and taxes



Total manufacturing costs


Beginning work in process inventory, Jan. 1



Less: Ending work in process inventory, Dec. 31


Cost of goods manufactured

S1 000 000

Schedule of Cost of Goods Sold

The determination of cost of goods sold is made via an examination of changes in finished goods:

KATRINA'S TRINKETS Schedule of Cost of Goods Sold For the Year Ending December 31, 20X6

Beginning finished goods inventory, Jan. 1 $ 250,000 Plus: Cost of foods manufactured (from schedule of work in process) 1.000.000 Goods available for sale $ 1,250,000 Less: Finished foods inventory. Dec. 31 190.000 Cost of goods sold (to income statement) $ 1.060.000

The Income Statement

An income statement for a manufacturer will appear quite similar to that of a merchandising company. The cost of goods sold number within the income statement is taken from the preceding schedules, and is found in the income statement below. All of the supporting schedules that were presented leading up to the income statement are ordinarily "internal use only" type documents. The details are rarely needed by external financial statement users who focus on the income statement. In fact, some trade secrets could be lost by publicly revealing the level of detail found in the schedules. For example, a competitor may be curious to know the labor cost incurred in producing a product, or a customer may think that the finished product price is too high relative to the raw material cost (e.g., have you ever wondered how much it really costs to produce a pair of $100+ shoes?).

Reviewing Cost of Flow Concepts for a Manufacturer

Review the following diagram that summarizes the discussion thus far. Notice that costs are listed on the left - the "product costs" have a blue drop shadow and the "period costs" have a pink drop shadow. Further, the "prime costs" of production have a back slash in the blue shadow, while the "conversion costs" have a forward slash in the blue shadow. Yes, the direct labor shadow has both forward and back slashes; remember that it is considered to be both a prime and a conversion cost!

Reviewing Cost of Flow Concepts for a Manufacturer

Critical Thinking About Cost Flow

It is easy to overlook an important aspect of cost flow within a manufacturing operation. Let's see if you have taken note of an important concept! Try to answer this seemingly simple question: Is depreciation an expense? You are probably inclined to say yes. But, the fact of the matter is that the answer depends! Let's think through this with an example. Suppose that Altec Corporation calculated deprecation of $500,000 for 20X1. 60% of this depreciation pertained to the manufacturing plant, and 40% related to the corporate offices. Further, Altec sold 75% of the goods put into production during the year. One third of the remaining goods placed in production were in finished goods awaiting resale, and the other portion was still being processed in the factory. So, what is the accounting implication? How does this all shake out? Let's reexamine the above diagram - this time with the flow of the $500,000 of depreciation superimposed (for this illustration, we are ignoring all other costs and looking only at the depreciation piece):

Critical Thinking About Cost Flow

First, notice that the $500,000 of depreciation cost enters the cost pool on the left; $300,000 attributable to manufacturing ($500,000 x 60%) and $200,000 to nonmanufacturing ($500,000 x 40%). The nonmanufacturing depreciation is a period cost and totally makes its way to expense on the right side of the graphic. But, the manufacturing depreciation follows a more protracted journey. It is assigned to work in process, and 75% of the goods put in process end up being completed and sold by the end of the year. Therefore, $225,000 of the $300,000 ($300,000 x 75%) is charged against income as cost of goods sold. The other $75,000 ($300,000 - $225,000 cost of goods sold) remains somewhere in inventory. In our fact situation, 1/3 of the $75,000 ($25,000) is attributable to completed goods and becomes part of finished goods inventory. The other $50,000 ($75,000 x 2/3) stays in work in process inventory since it is attributable to units still in production.

Confusing enough? The bottom line here is that only $425,000 of the depreciation was charged against income. The other $75,000 was assigned to work in process and finished goods inventory. In short, $500,000 ($300,000 + $200,000) entered on the left, and $500,000 can be found on the right ($50,000 + $25,000 + $225,000 + $200,000). Returning to the seemingly simple question, we see that a cost is not always an expense in the same period. In a manufacturing business, much of the direct material, direct labor, and factory overhead can end up in inventory - at least until that inventory is disposed.

How important are these cost flow concepts? Well, they are important enough that the FASB has specified external reporting rules requiring the allocation of production overhead to inventory. And, for tax purposes, the IRS has specific "uniform capitalization" rules. Under these rules, inventory must absorb direct labor, direct materials, and indirect costs including indirect labor, pensions, employee benefits, indirect materials, purchasing, handling, storage, depreciation, rent, taxes, insurance, utilities, repairs, design cost, tools, and a long list of other factory overhead items. A company's results of operations are sensitive to proper cost assignment, and management accountants are focused on processes for correctly measuring and capturing this information. Subsequent chapters will better acquaint you with this aspect of accounting.