Schedule of cost of goods manufactured Cost of Goods Reporting You have seen how product costs 'flow' through

accounts. The balances of the three inventory accounts along with the balance of cost of goods sold are used in preparing external financial statements. From a practical perspective, managers need to know more than total production costs. Even individual totals of materials, labor, and overhead for production. For internal needs management needs product cost information to determine selling prices, to compare actual with budgeted amounts, and to make other product related decisions.

Cost of Goods Manufactured A manufacturer prepares a separate cost of goods manufactured (CGM) report. It is often referred to as a schedule or statement, however, it is not part of GAAP financial reporting. It is used by managers in determining and controlling manufacturing costs incurred in a production period. Because of the need to monitor production costs closely, this report is created monthly or quarterly, rather than waiting until the end of the fiscal year. This enables managers to make changes if needed. The CGM report summarizes the manufacturing costs flowing in and out of the factory work area, i.e., the Work in Process account. and the bottom line cost of goods manufactured is inserted into the manufacturers income statement to calculate cost of goods sold.

Format of the CGM Report The CGM report uses information from the work in process and raw materials inventory accounts. at the beginning of the year. The activity that occurs in the WIP account consists of: Beginning work in process Add current period manufacturing costs: Direct materials used Direct labor incurred MOH

Less CGM (i.e., cost of completed products) Equals ending work In process Note that one amount reduces the WIP account balance--the CGM. The cost of goods manufactured is the cost of products that have been completed and transferred out during the period. From a practical standpoint, there may be a number of transfers, perhaps on a daily basis. We will assume that the CGM reduction to WIP is the total of all the completed goods costs that have been transferred out. One other issue relates to the MOH line item that appears in the report. The amounts that appear here are based on whether the company uses actual or normal costing: If normal costing is used: MOH = Applied Manufacturing Overhead. If actual costing is used: MOH = Actual Manufacturing Overhead. The format of the CGM report parallels the WIP account with the exception of the last two items. The last line of the CGM report coincides with the name of the report. Instead of subtracting CGM and ending with the ending WIP balance, we subtract the ending WIP balance and end with the CGM. Because we track RM inventory amounts, it is important to remember that direct materials used are considered costs of products. Do not confuse 'used' with the ending direct materials balance, which is an asset, or direct materials purchased, which may or may not be entirely used. We use the activity in the RM inventory account to determine the amount of RM used. The format of the CGM report follows: Cost of Goods Manufactured Direct Materials Used Beginning RM inventory + RM purchases Indirect materials issued to production Ending RM inventory = Direct Materials Used + Direct Labor + Manufacturing Overhead = Total Manufacturing Costs + Beginning Work in Process Inventory = Manufactured Goods Available Ending Work in Process Inventory = Cost of Goods Manufactured A CGM report contains a three-line statement heading similar to financial statements. Because the CGM report covers a period of time, the date format is similar to the income statement: Year Ending December 31, 2008, or Month Ending June 30, 2008

The date must specify the timer period covered.

Income Statement Presentation of Product Costs Cost of goods manufactured represents the total cost of products that have been completed during the current period and transferred out of WIP into finished goods. CGM is added to beginning FG inventory because it represents the added inventory items that are ready to be sold. The cost of inventory sold, known as Cost of Goods Sold, is subtracted from Finished Goods to arrive at ending FG inventory. The income statement of a manufacturing company is similar to that of a merchandising company. The cost of goods sold section of a merchandiser displays beginning merchandise inventory plus purchases minus ending merchandise inventory to arrive at cost of goods sold. There are two major differences in the merchandising company calculation of cost of goods sold compared to the manufacturing company calculation: 1. Merchandising; Purchases are added to beginning inventory Manufacturing: Cost of Goods Manufactured is added to beginning inventory Merchandising; Beginning and ending inventories are Merchandise Inventory Manufacturing: Beginning and ending inventories are Finished Goods.

2.

A partial income statement appears below for a manufacturing company. Partial Income Statement Sales Less: Cost of goods sold Beginning finished goods Add: Cost of goods manufactured Cost of goods available for sale Less: ending finished goods Gross profit

$ $ 40,000 1,070,000 1,110,000 30,000

A Note on Product Costs GAAP states that 'all costs necessary to get products ready to sell' should be included as inventory costs. The accrual basis applies when determining product costs. Costs included with raw materials are similar to those included with merchandising companies. These include: Invoice costs of materials, regardless if paid or accrued Cost of shipping inventory acquired (often called freight in or transportation in) Deduction of cash discounts for prompt payment Sales taxes if paid Costs of shipping to customers is a period cost because it is not part of the cost of getting the products ready to sell. This is often called freight out or transportation out.

Example Problem Karmon Audio, Inc. manufactures speakers. The company maintains both direct and indirect materials in its materials storeroom. During March, Karmons transactions and accounts included the following: Raw materials acquired for cash Raw materials received on account Indirect materials issued to production Costs to ship products to customers Direct labor cost incurred Total manufacturing overhead applied Total manufacturing overhead incurred Raw materials inventory, beginning Raw materials inventory, ending Finished goods inventory, beginning Finished goods inventory, ending Work in process inventory, beginning Work in process inventory, ending $65,000 18,000 1,000 2,000 41,000 25,000 24,700 3,500 3,600 9,000 11,300 12,000 14,200

Part 1: If Karmon employs a normal costing system, calculate the cost of direct materials transferred to production and prepare a expanded cost of goods manufactured report and a partial income statement for March. All activity from the RM account is used to calculate the cost of direct materials transferred to production. Setting up a RM t-account and post all amount to it: Raw Materials 3,500 65,000 18,000 1,000 81,900 3,600

Beginning Purchases Purchases

Indirect issued Direct issued

To calculate RM used, we use the information from the RM account. Raw materials inventory, beginning Materials purchased ($65,000 + $18,000) Less Indirect materials to production Less Raw materials inventory, ending Cost of direct materials issued to production $ 3,500 83,000 (1,000) (3,600) $81,900

Costs of shipping to customers is a period cost because it is not part of the cost of getting the products ready to sell.

An expanded cost of good manufactured report shows the materials activity rather than one line item for the cost of direct materials used in production. T he cost of goods manufactured report for March based on normal costing appears as follows: Expanded CGM Normal Costing Raw materials inventory, beginning Materials purchased ($65,000 + $18,000) Less Indirect materials to production Less Raw materials inventory, ending Direct materials issued to production Direct labor cost incurred Manufacturing overhead cost applied Total manufacturing costs Add: Work in process inventory, beginning Less: Work in process inventory, ending Cost of Goods Manufactured

$ 3,500 83,000 (1,000) (3,600) $81,900 41,000 25,000 147,900 12,000 (14,200) $145,700

Part 2: If Karmon employs a actual costing system, calculate the cost of direct materials transferred to production and prepare a cost of goods manufactured report and a partial income statement for March. The direct materials calculation is the same regardless if normal or actual costing is used. Recall that hte only difference is in manufacturing overhead. The cost of goods manufactured report for March based on actual costing appears as follows: Expanded CGM Actual Costing Raw materials inventory, beginning Materials purchased ($65,000 + $18,000) Less Indirect materials to production Less Raw materials inventory, ending Direct materials issued to production Direct labor cost incurred Manufacturing overhead cost incurred Total manufacturing costs Add: Work in process inventory, beginning Less: Work in process inventory, ending Cost of Goods Manufactured

$ 3,500 83,000 (1,000) (3,600) $81,900 41,000 24,700 147,600 12,000 (14,200) $145,400

Why do the two differ in amount of CGM? The amount used for MOH under normal costing is the amount applied, while the amount used for MOH under actual costing is the actual MOH cost. Because an adjustment is made at the end of the period for any over or underapplied MOH, total cost of goods sold will be the same as shown below: The underapplied overhead is calculated by subtracting incurred MOH from applied MOH: $25,000 - $24,700 = $300 overapplied. Because it is overapplied, we must decrease CGS..

CGS Normal Costing Beginning finished goods Add: Cost of goods manufactured Cost of goods available for sale Less: ending finished goods Unadjusted CGS Overapplied adjustment Cost of goods sold CGS Actual Costing Beginning finished goods Add: Cost of goods manufactured Cost of goods available for sale Less: ending finished goods Cost of goods sold The total amount of cost of goods sold is the same regardless oif actual or normal costing after the under or overapplied MOH has been closed.

9,000 145,700 154,700 (11,300) 143,400 (300) $143,100

9,000 145,400 154,400 (11,300) $143,100

Process and Job-Order Costing

Under absorption costing, product costs include all manufacturing costs. Some manufacturing costs, such as direct materials, can be directly traced to particular products. For example, the cost of the airbags installed in a Toyota Camry can be easily traced to that particular auto. But what about manufacturing costs like factory rent? Such costs do not change from month to month, whereas the number and variety of products made in the factory may vary dramatically from one month to the next. Because these costs remain unchanged from month to month regardless of what products are made, they are clearly not caused byand cannot be directly traced toany particular product. Therefore, these types of costs are assigned to products and services by averaging across time and across products. The type of production process influences how this averaging is done. We discuss two different costing systems in the sections that followprocess costing and job-order costing.

Process Costing
Process costing is used in companies that produce many units of a single product for long periods. Examples include producing paper at Weyerhaeuser, refining aluminum ingots at Reynolds Aluminum, mixing and bottling beverages at Coca-Cola, and making wieners at Oscar Mayer. These are all homogeneous products that flow through the production process on a continuous basis.

Process costing systems accumulate costs in a particular operation or department for an entire period (month, quarter, year) and then divide the accumulated total manufacturing cost by the total number of units produced during the period. The basic formula for process costing is:

Because all units are the same, each unit produced during the period is assigned the same average cost. This costing technique results in a broad, average unit cost figure that applies to homogeneous units flowing in a continuous stream out of the production process.

Job-Order Costing
Job-order costing is used in situations where many different products are produced each period. For example, a Levi Strauss clothing factory would typically make many different types of jeans for both men and women during a month. A particular order might consist of 1,000 stonewashed mens blue denim jeans, style number A312. This order of 1,000 jeans is called a job. In a joborder costing system, costs are traced and allocated to jobs and then the total costs of the job are divided by the total number of units in the job to arrive at an average cost per unit. Other examples of situations where job-order costing would be used include large-scale construction projects managed by Bechtel International, commercial aircraft produced by Boeing, greeting cards designed and printed by Hallmark, and airline meals prepared by LSG SkyChefs. All of these examples are characterized by diverse outputs. Each Bechtel project is unique and different from every otherthe company may be simultaneously constructing a dam in Zaire and a bridge in Indonesia. Likewise, each airline orders a different type of meal from LSG SkyChefs catering service.

Job-order costing is also used extensively in service industries. For example, hospitals, law firms, movie studios, accounting firms, advertising agencies, and repair shops all use a variation of job-order costing to accumulate costs. Although the detailed example of job-order costing provided in the following section deals with a manufacturing company, the same basic concepts and procedures are used by many service organisations