Cost of goods manufactured

Cost of goods manufactured refers to the cost of goods brought to completion, whether they were started before or during the current accounting period.

Must have to know to solve the problem:

=> Cost of beginning inventory
=> Cost of goods manufactured
=> Cost of goods available for sale
=> Cost of ending inventory
=> Cost of goods sold

Beginning inventory:

Beginning inventory is the recorded cost of inventory in a company's accounting records at the start of an accounting period. The beginning inventory is the recorded cost of inventory at the end of the immediately preceding accounting period, which then carries forward into the start of the next accounting period.

Beginning inventory is an asset account, and is classified as a current asset. Technically, it does not appear in the balance sheet, since the balance sheet is normally created as of a specific date, which is normally the end of the accounting period, and so the ending inventory balance appears on the balance sheet. However, as just noted, beginning inventory is the same as the ending inventory from the immediately preceding accounting period, so it does appear in the balance sheet as the ending inventory in the preceding period.

The primary use of beginning inventory is to serve as the starting point of the cost of goods sold calculation for an accounting period, for which the calculation is:

Beginning inventory

+ Purchases during the period

- Ending inventory

= Cost of goods sold

A secondary use of beginning inventory is for the calculation of average inventory, which is used in the denominator of a number of performance measurements, such as the inventory turnover formula. These measurements can use just the ending inventory figure, but using the beginning and ending inventory balances to derive an average inventory figure for an accounting period tends to generate a smoothing effect that counteracts an unusually high or low ending inventory figure.

The cost of goods manufactured:

The cost of goods manufactured is the cost assigned to units either completed or still in the process of being completed at the end of an accounting period. This cost is most useful when disaggregated into its component parts and examined on a trend line. By doing so, you can determine the costs that a company is incurring over time to produce a certain mix and quantity of units. The concept is useful for examining the cost structure of a company's production operations.

Cost of goods available for sale:

Cost of goods available for sale is the total recorded cost of beginning finished goods or merchandise inventory in an accounting period, plus the cost of any finished goods produced or merchandise added during the period. Thus, the calculation of the cost of goods available for sale is:

Beginning sellable inventory 

+ finished goods produced 

+ Merchandise acquired

The cost of any freight needed to acquire merchandise (known as "freight in") is typically considered a part of this cost.

Ending inventory:

Ending inventory can be considered either the total unit quantity of ending units of inventory in stock at the end of an accounting period, or the total valuation of that inventory at the end of an accounting period. The ending inventory figure is needed to derive the cost of goods sold, as well as the ending inventory balance to include in a company's balance sheet.

The cost of goods sold:

The cost of goods sold includes those costs attributable to the products or services sold by a business. It is usually separately reported in the income statement, so that the gross margin can also be reported. Analysts like to track the gross margin percentage on a trend line, to see how well a company's price points and production costs are holding up in comparison to historical results.

One way to calculate the cost of goods sold is to aggregate the period-specific expense listed in each of the general ledger accounts that are designated as being associated with the cost of goods sold. This list usually includes the following accounts:

§                        Direct materials

§                        Direct labor

§                        Factory overhead

§                       Freight in and freight out

The list may also include commission expense, since this cost usually varies with sales. The cost of goods sold does not include any administrative or selling expenses.

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