The Flow of Cost of Goods Manufactured

Raw material cost (Raw Material Warehouse)

  1. Let’s assume that we are manufacturing furniture, and we have a couple of building to store manufacturing facility. First building is raw material warehouse. Now what goes into raw material? Let’s assume that raw material are made up of wood, nail, glue to make a table. Wood would be an example of direct material. Nail and glue would be example of indirect material. However all of 3 material would be stored in a raw material warehouse.
  2. From the accounting standpoint I am going to show you first how to calculate the direct material used in the production process during this period of time. So we start off with the beginning direct material inventory. And if we recall the ending inventory of one month becomes the beginning inventory of the next month, this is the beginning direct material inventories of Rp.1,000,000. To this we are going to add new purchases of direct material. So we have negotiated with supplier, negotiated with different supplier, and automatically chosen one supplier to buy a wood from. And so in this month we have purchased Rp.2,000,000 of wood.
  3. Now in addition to the base purchased cost, it also cost as transportation fee to bring the wood over to a factory. Those transportation cost we classified as freight in, would be involved in the cost of purchasing direct material. In this case this is Rp.500,000. So this gives us the total Rp.3,500,000 of direct material available for usage in the production process in a month.
  4. So earlier we had Rp.3,500,000 of direct material available. Now we only have Rp.1,900,000. So obviously the difference between the two is Rp.1,600,000. Rp.1,600,000 would be the amount of direct material used in the production process this period of time. So that’s the way to calculate the direct material used, in this case Rp.1,600,000.

Product Cost

Cost Of Goods Manufactured (Plant)

cogm

  1. Now where this information will go? Next we look at the WIP(work in process) account. But before we look at WIP account, let’s go down here where I have building no2 the plant. So earlier we had building no1 raw material warehouse. Now we have building no2 the plant.
  2. So visualize this the material are moving from building no1 raw material warehouse to building no2 the plant. For accounting purpose we don’t have account called plant, but we have account called WIP.
  3. WIP broadly represents all of the activity that takes place physically in the plant. One way to understand WIP is value of partially finished goods. If we call manufacturing is continuous process, so at the end of any given month you may have a number of partially finished furniture. That become your WIP.
  4. So in this example a beginning inventory of WIP is Rp.5,000,000. To that we add the product cost of this month. Product cost we recall from earlier discussion is main of 3 components, direct material, direct labor and manufacturing factory overhead. So in this example we have Rp.1,600,000 of direct material used, if recall the previous calculation.
  5. Then we have Rp.3,000,000 of direct labor. Where do we get this? There are multiple sources in real world, as to (regarding to) way can pick up this information from. One possible source would be the time sheet of factory worker that are directly involved to factory process.
  6. Next we look at the manufacturing overhead. You may recall from earlier discussion. Manufacturing overhead are all of factory related cost that are not classified as direct material, not classified as direct labor.
  7. Can you think some example of factory overhead? How about factory utilities, factory supervisor salary that would be indirect labor which is also the part of factory overhead.
  8. So in this example we have Rp.4,400,000 of manufacturing overhead. So we add off beginning WIP to the direct material used, to the direct labor, and then to the MOH. We end up of total manufacturing cost to be accounting for Rp.14,000,000.
  9. Then the first forward to the end of month. At the end of month we take inventory gain of a partially finished products, that’s are ending WIP inventory. In this example ending WIP inventory is valued as Rp.2,500,000. So when we take difference between total manufacturing cost Rp.14,000,000 less your inventory WIP Rp.2,500,000. You end up with the cost of goods manufactured of Rp.11,500,000.

Cost Of Goods Sold (Finished Goods Warehouse)

  1. Let’s understand the cost of goods manufactured. What I mean by this term? This is your cost of the good that have been fully finished. What happen when you go to fully finished? Remember your building no2 plant. Once your goods is fully finished, it moves to the next building. Building no3 we call as finished good warehouse.
  2. This is where the merchandise is stored waiting to be sold to the customer. The cost of goods manufactured goes right into the next self calculation. So here we have beginning finished goods of Rp.1,800,000.
  3. And then during this month we get new batch of goods fully manufactured in the amount of Rp.11,500,000 that be just finished calculating earlier. This gives us the cost of goods available for Rp.13,300,000, that is your beginning finished inventory plus your cost of goods manufactured.
  4. During this month you are selling some of these merchandise to your customers. Well what is your cost of this merchandise that you have sold? To get that, we first forward to the end of month and we take another inventory of a finished goods.
  5. In this example ending finished good inventory is Rp.3,000,000. We recall Rp.13,300,000 of finished good available to sell to the customer. We only have Rp.3,000,000 left at the end of the month of these finished goods.
  6. So the difference between the two is Rp.10,300,000. This represent our cost of the goods that have been sold. We call this cost of goods sold. So this would be the calculation for the both the cost of good manufacture and the cost of goods sold.
  7. Please don’t confuse the cost of goods sold with sales. If I said our company’s policy is to sale everything at double its cost, then in this period of time what would be a sales? Remember the cost is Rp.10,300,000, a cost would be sold. So a sales would be double up number which is Rp.20,600,000. So remember the relationship between sales and then the cost of goods sold.
  8. So we have 3 buildings, building one is raw material warehouse, where (from which) the material flow into the building which is the plant, and then from the plant once a goods are fully finished, that flow into the building no3 which is finish goods warehouse.

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