MANAGEMENT ACCOUNTING:

A BUSINESS PARTNER
Lecture # 2

16-2

COST OF GOODS SOLD

Merchandiser

Manufacturer

Beginning merchandise
inventory

Beginning finished goods

inventory

Plus purchases

Plus cost of goods

manufactured

Merchandise available for sale

Less ending merchandise
inventory
Cost of good sold

McGraw-Hill/Irwin

Finished goods available for

sale
Less ending finished goods
inventory
Cost of good sold

The McGraw-Hill Companies, Inc., 20

16-3

INVENTORIES OF A
MANUFACTURING BUSINESS

Raw
Raw materials
materials-- inventory
inventoryon
on
hand
handand
andavailable
availablefor
foruse.
use.

Finished
Finished
goodsgoodscompleted
completed
goods
goodsawaiting
awaiting
sale.
sale.

McGraw-Hill/Irwin

Work
Work in
in
process
process-partially
partially
completed
completed
goods.
goods.

The McGraw-Hill Companies, Inc., 20

16-4

FLOW OF COSTS ASSOCIATED

WITH PRODUCTION
Direct
materials
purchased

Direct
materials
used

Materials
Inventory
$$$ $$$

Work in Process
Inventory
$$$ $$$

Direct labor &

Manufacturing Overhead

Cost of goods
manufactured

McGraw-Hill/Irwin

Finished Goods
Inventory
$$$

$$$

Cost of
Goods Sold
$$$

The McGraw-Hill Companies, Inc., 20

16-5

ILLUSTRATION OF ACCOUNTING FOR MANUFACTURING

COSTS

Materials
xx
Accounts Payable

Wages Payable
Cash

Work in Process
Factory Overhead

xx

xx

xx
xx

Work in Process (Direct Labor) xx

Payroll
xx
Factory Overhead (Depr. Bldg) xx
Selling & Admin Exp (Depr. Bldg)
Accum. Depr. Bldg
xx

xx

Factory Overhead (Depr. Mach & Eq)

xx
Accum. Depr. Mach & Eq
xx

McGraw-Hill/Irwin

Factory Overhead (Utilities)

xx
Selling & Admin Exp (Utilities) xx
Accounts Payable
xx

xx

Work in Process (Direct Materials)

Materials
xx
Payroll
xx
Wages Payable

xx
xx

Finished Goods
xx
Work in Process
Accounts Payable
Cash

xx
xx

xx

Accounts Receivable
Sales

xx
xx

Cost of Goods Sold

Finished Goods

xx

Cash
xx
Accounts Receivable

xx

xx

The McGraw-Hill Companies, Inc., 20

16-6

FLOW OF COSTS ASSOCIATED

WITH PRODUCTION

Pure-Ice
Pure-Ice Inc.
Inc. had
had $52,000
$52,000 of
of inventory
inventory in
in
direct
direct materials
materials inventory
inventory on
on January
January 1,
1,
2005.
2005. During
During the
the year,
year, Pure-Ice
Pure-Ice
purchased
purchased $586,000
$586,000 of
of additional
additional direct
direct
materials.
materials. At
At December
December 31,
31, 2005,
2005, $78,000
$78,000
of
of the
the direct
direct materials
materials were
were still
still on
on hand.
hand.

How
How much
much direct
direct material
material was
was
placed
placed into
into production
production during
during 2005?
2005?

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc., 20

16-7

FLOW OF COSTS ASSOCIATED

WITH PRODUCTION

+
=

Beginning materials
inventory
Materials purchased
Materials available to be
placed into production
Materials placed into
production
Ending materials
inventory

McGraw-Hill/Irwin

52,000
586,000
638,000

?
$

78,000

The McGraw-Hill Companies, Inc., 20

16-8

FLOW OF COSTS ASSOCIATED

WITH PRODUCTION

+
=

Beginning materials
inventory
Materials purchased
Materials available to be
placed into production
Materials placed into
production
Ending materials
inventory

McGraw-Hill/Irwin

52,000
586,000
638,000

560,000
$

78,000

The McGraw-Hill Companies, Inc., 20

16-9

FLOW OF COSTS ASSOCIATED

WITH PRODUCTION

In
In addition
addition to
to the
the direct
direct materials,
materials, PurePureIce
Ice incurred
incurred $306,000
$306,000 of
of direct
direct labor
labor cost
cost
during
during 2005.
2005. Manufacturing
Manufacturing overhead
overhead for
for
2005
2005 was
was $724,000.
$724,000.
Pure-Ice
Pure-Ice started
started 2005
2005 with
with $132,000
$132,000 in
in
work
work in
in process.
process. During
During 2005,
2005, units
units
costing
costing $1,480,000
$1,480,000 were
were transferred
transferred to
to
finished
finished goods
goods inventory.
inventory.

What
What is
is the
the ending
ending balance
balance in
in work
work
in
in process
process at
at December
December 31,
31, 2005?
2005?

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc., 20

16-10

FLOW OF COSTS ASSOCIATED

WITH PRODUCTION

+
=

Be ginning w ork in
proce ss inve ntory
Ma nufa cturing costs
a dde d
Tota l costs in proce ss
duri ng the ye a r
Cost of goods
compl e te d duri ng the
ye a r
Ending w ork in
proce ss inve ntory

Direct Materials
Direct Labor
Manufacturing
Overhead
Total costs added
during the year

McGraw-Hill/Irwin

132,000
1, 590, 000
1, 722, 000

(1, 480, 000)

?

$ 560,000
306,000
724,000
$ 1,590,000

The McGraw-Hill Companies, Inc., 20

16-11

FLOW OF COSTS ASSOCIATED

WITH PRODUCTION

+
=

Beginning work in
process inventory
Manufacturing costs
added
Total costs in process
during the year
Cost of goods
completed during the
year
Ending work in
process inventory

McGraw-Hill/Irwin

132,000
1,590,000
1,722,000

(1,480,000)
$ 242,000

The McGraw-Hill Companies, Inc., 20

16-12

DETERMINING THE COST OF FINISHED GOODS

MANUFACTURED

A
Aschedule
schedule of
of the
the cost
cost
of
of finished
finished goods
goods
manufactured
manufactured is
is
prepared
prepared to
to provide
provide
managers
managers with
with an
an
overview
overview of
of
manufacturing
manufacturing
activities
activities during
during aa
period.
period.

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc., 20

16-13

CONQUEST, INC.
Schedule of the Cost of Finished Goods Manufactured
For the Year Ended December 31, 2005

Work in process inventory, beg.

Manufacturing cost assigned to
production:
Direct materials
Direct labor
Manufacturing overhead

Total manufacturing costs

Total cost of all work in process
during the year
Less: Work in process
inventory, end of year
Cost of finished goods manufactured

McGraw-Hill/Irwin

30,000

150,000
300,000
360,000
810,000
840,000

(40,000)
800,000

The McGraw-Hill Companies, Inc., 20

16-14

Beginning finished goods

inventory
Add: Cost of finished goods
manufactured
during the year
CONQUEST,
INC.
Schedule of the Cost of Finished Goods Manufactured
Cost of finished goods
For the Year Ended December 31, 2005
available for sale
finished goods
Work in process inventory, beg.Less: Ending
$
30,000
Manufacturing cost assigned to
inventory
production:
Cost
of goods sold
Direct Materials
$
150,000
Direct Labor
Manufacturing overhead
Total manufacturing costs
Total cost of all work in process
during the year
Less: Work in process
inventory, end of year
Cost of finished goods manufactured

McGraw-Hill/Irwin

300,000
360,000

$ 150,000

800,000
950,000
168,000
$ 782,000

810,000
840,000

(40,000)
800,000

The
The cost
cost of
of goods
goods
completed
completedduring
during
the
theperiod
periodis
isused
used
to
tocompute
computeCOGS
COGS
for
for the
theperiod.
period.

The McGraw-Hill Companies, Inc., 20

16-15

The income
statement is
prepared
using
established
financial
accounting
procedures.

McGraw-Hill/Irwin

CONQUEST, INC.
Income Statement
For the Year Ended December 31, 2005
Sales
Cost of goods sold
Gross profit on sales
Operating expenses
Income from operations
Less: Interest expense
Income before income
taxes
Income tax expense
Net income

$ 1,300,000
782,000
$ 518,000
400,000
$ 118,000
18,000
$
$

100,000
30,000
70,000

The McGraw-Hill Companies, Inc., 20