Question

the computation of cost of goods manufactured on the income statement IS . (ASSUME THERE ARE NO WORK-IN- PROCESS INVENTORY)

Answer 1

The cost of goods produced during an accounting period is called cost of goods manufactured. Cost of goods manufactured is sum of direct material used, direct labour used and manufacturing overhead.  

Generally cost of goods manufactured also includes beginning inventory and ending inventory.

Direct materials are materials that are directly related to the production of goods.

Direct labour is labour that is directly related to the manufacturing of goods.

Manufacturing overhead is also called factory overhead. Manufacturing overheads are overheads that are indirectly related to the production of goods.

Manufacturing overhead includes-

(1) indirect material, indirect labour

(2) Rent of building, factory used in production process.

(3) Depreciation on equipment and machines used in production process.

(4) Taxes and insurance expenses related to production process.

(5) Salary of maintenance staff, factory personnel etc.

(6) Electricity charges of factory.

EXAMPLE-

COST OF GOODS MANUFACTURED

Direct material $10000

Direct labour $5000

Depreciation $4000

Salary of factory personnel $2000

Electricity charges of factory $500

Rent of factory $1000

From the above data calculate cost of goods manufactured-

SOLUTION-

Cost of goods manufactured

Direct material + direct labour + manufacturing overhead

In this question, total manufacturing overhead is depreciation + salary + rent + electricity charges

$4000 + $2000 + $1000 + $500

$7500

So cost of goods manufactured

Direct material + direct labour + manufacturing overhead

$10000 + $5000 + $7500

$22500

Hence cost of goods manufactured is $22500