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Managerial Accounting For Dummies
By Mark P. Holtzman
Cost of goods manufactured is based on the amount of work-in-process completed. This work-in-process includes costs of direct
materials put into production, plus direct labor and overhead.
To determine work-in-process, you enter the number of units or costs into the same outputs formula that you use to calculate direct
materials put into production.
To compute the number of units manufactured, start with the number of units of work-in-process in beginning inventory (Beginning).
Add the number of units of direct materials put into production (Inputs) and then subtract the number of units of work-in-process in
ending inventory (Outputs).
Suppose that your chocolate milk factory started the year with 200 gallons of unmixed ingredients in the blenders. During the year,
another 4,000 gallons of ingredients were taken out of storage and poured into the blenders. At the end of the year, 300 gallons of
unmixed ingredients were still in the blenders (planned for production next year). Plug these numbers into the outputs formula:
The factory completed 3,900 gallons of chocolate milk during the period. From here, you’re ready to figure out the total cost of
chocolate milk manufactured and its cost per unit.
Consider the cost of goods manufactured for the chocolate milk factory. Your beginning inventory cost $2,000. The factory put
$10,000 worth of direct materials into production and spent $5,000 on direct labor and another $4,000 on overhead. At the end of
the year, you counted $3,000 worth of ending inventory. Feeling overwhelmed? Hang in there! To compute cost of goods
manufactured, just apply the outputs formula:
This result tells you that the factory’s output of chocolate milk during the year cost $18,000.