Cost of Goods Manufactured : Cost of Goods Sold

Cost of Goods Sold

Like any other company, a manufacturing company has to create an income statement. On that income statement they will report Sales less Cost of Goods Sold to determine their Gross Profit.

For a manufacturing company the calculation of Cost of Goods Sold will differ from a merchandising company because a manufacturing company makes its inventory (the product it plans to sell), while a merchandiser purchases it.

If you remember - the calculation for Cost of Goods Sold (for a merchandiser) is;

Beginning Inventory + Purchases - Ending Inventory = Cost of Goods Sold

When a manufacturer does this calculation, the cost of purchases is replaced by the cost to produce/make product - this is cost of goods manufactured - so the calculation looks like this;

Beginning Inventory + Cost of Goods Manufactured - Ending Inventory = Cost of Goods Sold

Cost of Goods Manufactured

Cost of Goods Manufactured is comprised of the total costs incurred to make the product - these include all Direct Labor, Direct Materials and Overhead incurred - in other words total manufacturing costs.

So, to calculate Cost of Goods Manufactured for a period, a manufacturing company has to identify Direct Labor, Direct Materials and Overhead costs (i.e. manufacturing costs) incurred to make product during that period of time.

The calculation of cost of goods manufactured is;

Beginning Work In Process $

+ Manufacturing Costs ($) Incurred

(Direct Labor + Direct Materials used + Overhead costs)

- Ending Work in Process $

= Cost of Goods Manufactured.

In order to do this calculation the company will create a Cost of Goods Manufactured Statement. (see above)

On the Cost of Goods Manufactured statement;

Direct Materials used is derived from the following calculation;

Beginning Raw Materials Inventory + Purchases - Ending Raw Materials Inventory = Direct Materials Used

Direct Labor is based on time charged by workers in the manufacturing process.

Overhead costs are an accumulation of costs, such as production-related indirect materials and indirect labor as well as depreciation, property taxes, insurance for production related facilities.