There are generally numerous factors involved in determining the cost of goods sold in a manufacturing environment. Companies that are in the business of manufacturing a product will often use a statement or schedule of cost of goods in conjunction with the income statement to determine profit of loss. This article looks at creating a cost of goods manufactured statement and its application to the income statement.
Gross Profit and Cost of Goods Sold in Manufacturing
Generally in a retail environment, determining the cost of good sold (COGS) is relatively simple. With a few exceptions, the COGS in a retail business are the actual purchase cost of the product. To determine gross profit on the income statement, the calculation is relatively simple.
Gross Profit = Sales – Cost of Good Sold
The calculation for gross profit in a manufacturing environment is essential the same as a retail environment. The biggest difference is how the cost of goods sold is determined. In a manufacturing environment there are many factors involved in costing the finished product. Before establishing the cost of goods sold, for the purpose of the income statement, total factory costs need to be determined.
Cost of Goods Manufactured Statement
The statement for the cost of goods manufactured (COGM) is used to determine gross profit on the income statement. The statement is completed for a specific accounting period like a particular month. Thus the income statement is done in conjunction with the cost of goods manufactured statement for the same accounting period.
The statement for the COGM is a basic formula that is then transferred to the income statement. In order to create the COGM statement, total factory costs along with the beginning and ending work-in-process inventory must be determined. The statement should also list the individual factory costs categories separately. The formula for the statement is:
COGM = Total Factory Cost +Beginning Work-in-Process Inventory – Ending Work-in-Process Inventory
Calculating Total Factory Cost
Calculating total factory costs for the purpose of determining the cost of goods manufactured can vary from one business to another. Some costs associated with total factory costs may be used for the actual COGM statement or they could be listed separately as an expense on the income statement. With this premise in mind, below are some examples of individual factory costs categories that may be used on the cost of goods manufactured statement.
- Direct Materials Cost is the actual cost of all materials that are used in the production of a finished product
- Direct Labor Cost is the expense of the actual internal wages associated with the production of a finished product.
- Variable Manufacturing Cost fluctuates with output. Examples may include equipment depreciation, utilities, outside labor, plant or equipment maintenance and material handling.
- Fixed Manufacturing Overhead costs remain the same regardless of manufacturing output. Salaries paid to plant managers, rent on the facilities and insurance are some examples.
Once the cost of goods manufactured statement is completed, the total is then transferred to the income statement. The beginning finished inventory is added to the COGM total and the ending finished goods inventory is subtracted. This total, as reported on the income statement is the actual cost of goods sold. The cost of goods sold is then subtracted from sales to determine gross profit.
James Clausen - Clausen received a Bachelors Degree in Business Administration in Automotive Management and Marketing at Northwood University, graduating ...
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