The key to preparing an income statement for a manufacturing organization is computing its cost of goods sold, which means that you must first determine the cost of goods manufactured. This dollar amount is calculated on the statement of cost of goods manufactured, a special report based on an analysis of the Work in Process Inventory account. At the end of an accounting period, the flow of all manufacturing costs incurred during the period is summarized in this statement It is helpful to think of the statement of cost of goods manufactured as being developed in three steps:
Step 1. Compute the cost of direct materials used during the accounting period.As shown in add the beginning balance in the Materials Inventory account to the direct materials purchased. The subtotal the cost of direct materials available for use during the accounting period. Next, subtract the ending balance of the Materials Inventory account from the cost of direct materials available for use.The difference is the cost of direct materials used during the period.
Step 2. Calculate total manufacturing costs for the period. As shown in the costs of direct materials used and direct labor are added to total overhead costs incurred during the period to arrive at total manufacturing costs.
Step 3. Determine total cost of goods manufactured for the period. As shown in add the beginning balance in the Work in Process Inventory account to total manufacturing costs to arrive at the total cost of work in process during the period. From this amount, subtract the ending balance in the Work in Process Inventory account to arrive at the
cost of goods manufactured.
Step 1. Compute the cost of direct materials used during the accounting period.As shown in add the beginning balance in the Materials Inventory account to the direct materials purchased. The subtotal the cost of direct materials available for use during the accounting period. Next, subtract the ending balance of the Materials Inventory account from the cost of direct materials available for use.The difference is the cost of direct materials used during the period.
Step 2. Calculate total manufacturing costs for the period. As shown in the costs of direct materials used and direct labor are added to total overhead costs incurred during the period to arrive at total manufacturing costs.
Step 3. Determine total cost of goods manufactured for the period. As shown in add the beginning balance in the Work in Process Inventory account to total manufacturing costs to arrive at the total cost of work in process during the period. From this amount, subtract the ending balance in the Work in Process Inventory account to arrive at the
cost of goods manufactured.
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