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Understanding COGS in Manufacturing and Merchandising

Apr 14, 2025

Accounting 2301 Chapter 11 Video 3 Notes

Overview

  • Final video for Chapter 11
  • Focus: Product costs and computing cost of goods manufactured
  • Examination of financial statements from manufacturers

Income Statements

  • No major difference in the income statement for manufacturers compared to others discussed before

Periodic Inventory System

  • Introduced in Chapter 7
  • Essential for calculating cost of goods sold
  • Uses information from beginning, during, and end of a period

Cost of Goods Sold (COGS) Calculation

  • Expense listed on the income statement
  • Requires calculation of costs for purchased and manufactured goods
  • Merchandising Perspective: Straightforward with few costs (acquisition cost, taxes, freight)
  • Manufacturing Perspective: More complex with additional costs to account for

COGS Formula for Merchandising

  1. Start with beginning inventory
  2. Add cost of purchases
    • Includes acquisition, taxes, freight
  3. Subtract ending inventory
  4. Result is the cost of goods sold

COGS Formula for Manufacturing

  1. Start with finished goods inventory
  2. Add cost of goods manufactured
  3. Subtract ending inventory
  4. Result is the cost of goods sold
  • Note: Difference between "manufactured" and "purchased" goods in computation

Manufacturing Cost Components

  • Total manufacturing cost includes:
    • Direct materials
    • Direct labor
    • Manufacturing overhead

Calculation of Total Manufacturing Cost

  1. Begin with work in process inventory
    • Items in manufacturing but not completed
  2. Add all manufacturing costs:
    • Direct materials
    • Direct labor
    • Manufacturing overhead
  3. Subtract ending work in process inventory
    • Uncompleted work
  4. Result: Cost of goods manufactured

Importance of Work in Process (WIP)

  • WIP includes items that started manufacturing but are not yet finished
  • Essential to track beginning and ending WIP to calculate manufacturing costs

Cost of Goods Manufactured Schedule

  • Detailed breakdown required
  • Must account for all manufacturing expenditures

Conclusion

  • Importance of understanding differences in COGS calculations between merchandising and manufacturing
  • Need for detailed tracking of manufacturing processes to accurately compute costs

Visuals and Additional Materials

  • Images and PDFs were referenced in the original material for visual aid and further detail.