Question

Describe the flow of costs from raw materials to cost of goods in a manufacturing organization

Answer 1

Solution:

The production cycle begins, with the raw materials inventory, raw material is used in production and contribute towards cost of goods manufactured. When the cost of the raw materials entered into production, the amount of raw material consumed transferred to a new account called work-in-process inventory, which is the cost of incomplete products. There are other manufacturing cost such as direct labor and manufacturing overhead costs that are also incurred and charged to Work in process. Direct costs are directly related to the production of a unit of output. Overhead costs are all costs incurred that are not direct materials costs or direct labors costs. Overhead costs are allocated to work in process as per costing system followed like predetermined plant wide single overhead rate or multiple overhead rate using activity based costing. When the manufacturing process ends, the cost of completed units is taken to the finished goods inventory, which is the cost of completed products not yet to sold. When the goods are sold, the cost is transferred from the account of finished goods inventory to cost of goods sold, which means the cost of the product already sold. This process affects directly four accounts used to record the product cost, and these accounts are reflected in the financial statement. These accouts are as under:

1. Raw Material inventory - Balance Sheet (Assets)

2. Work in Process Inventory - Balance Sheet (Assets)

3. Finished goods inventory - Balance Sheet (Assets)

4. Cost of goods sold - Income Statement (Cost)