2 an introduction to cost terms and purposes - Pearson Learning ...

Step 3: Cost of goods manufactured in 2007
The cost of goods manufactured during 2007 includes the cost of beginning
work in process and costs incurred during the year. Also note that some of
the manufacturing costs incurred during 2007 are held back as the cost of
the ending work-in-process inventory. The cost of goods manufactured in
2007 is calculated as (shaded teal):
Beginning work-in-process inventory, January 1, 2007 $ 6,000
+ Total manufacturing costs incurred in 2007 105,000
= Total manufacturing costs to account for 111,000
− Ending work-in-process inventory, December 31, 2007 7,000
= Cost of goods manufactured in 2007 $104,000
Study Tip: To check
your understanding of the
income statement for manufacturing
companies, see Featured
Exercise 2, true–false statement
8, and multiple-choice question 7
(Student Guide, beginning p.13).
Fully explained solutions begin
on p. 19.
Exhibit 2-8 shows related general-ledger T-accounts for Cellular Products’ manufacturing
cost flow. Note how the cost of goods manufactured ($104,000) is the cost of all
goods completed during the accounting period. These costs are all inventoriable costs.
Goods completed during the period are transferred to finished goods inventory. These
costs become cost of goods sold in the accounting period when the goods are sold. Also
note that the direct materials, direct manufacturing labor, and manufacturing overhead
costs of the units in work-in-process inventory ($7,000) and finished goods inventory
($18,000) as of December 31, 2007, will appear as an asset in the balance sheet. These
costs will become expenses next year, when these units are sold.
The $70,000 comprising marketing costs, distribution costs, and customer-service
costs are period costs of Cellular Products. These period costs include, for example,
salaries of salespersons, depreciation on computers and other equipment used in marketing,
and the cost of leasing warehouse space for distribution. Operating income of
Cellular Products is $32,000. Operating income is total revenues from operations
minus cost of goods sold and operating costs (excluding interest expense and income
taxes).
Newcomers to cost accounting frequently assume that indirect costs such as rent, telephone,
and depreciation are always costs of the period in which they are incurred and are
not associated with inventories. When these costs are incurred in marketing or in corporate
headquarters, they are period costs. However, when these costs are incurred in manufacturing,
they are manufacturing overhead costs and are inventoriable.
Recap of Inventoriable Costs and Period Costs
Exhibit 2-9 highlights the differences between inventoriable costs and period costs.
Panel A uses the manufacturing sector to illustrate these differences. The merchandising
sector is shown in Panel B. First study Panel A. The manufacturing costs of finished
goods include direct materials, other direct manufacturing costs such as direct manufacturing
labor, and manufacturing overhead costs such as supervision, production control,
and machine maintenance. All these costs are inventoriable: They are assigned to workin-process
inventory until the goods are completed and then to finished goods inventory
until the goods are sold. All nonmanufacturing costs, such as R&D, design, and distribution
costs, are period costs.
EXHIBIT 2-8
General-Ledger T-Accounts for Cellular Products’ Manufacturing Cost Flow
Work-in-Process Inventory Finished Goods Inventory Cost of Goods Sold
CHAPTER 2
40
Bal. Jan. 1, 2007 6,000 Cost of goods Bal. Jan. 1, 2007 22,000 Cost of goods sold 108,000 108,000
Direct materials used 76,000 manufactured 104,000 104,000
Direct manuf. labor 9,000 Bal. Dec. 31, 2007 18,000
Manuf. overhead costs 20,000
Bal. Dec. 31, 2007 7,000
ISBN: 0-536-53243-5
Cost Accounting: A Managerial Emphasis, Twelfth Edition, by Charles T. Horngren, Srikant M. Datar, and George Foster.
Copyright © 2006 by Pearson Education, Inc. Published by Prentice Hall.