Unit 6: Lesson 22: The flow of Product Costs in Manufacturing

Manufacturing Business Process

Costs flow through several inventory accounts before becoming an expense.

Cost Flow Path

1. Raw Materials Inventory

2. Work in Progress (WIP)

3. Finished Goods Inventory

4. Costs of Goods Sold (COGS) This would be an expense on a income statement.

Work In Progress (WIP)

It is an account considered the center of attention because, all manufacturing costs flow into it.

Product Costs (Manufacturing Costs)

All costs necessary to manufacture a product inside the factory.

3 Different Types of Product Costs

1. Direct Materials

2. Direct Labor

3. Manufacturing Overhead

Direct Materials (DM)

• Raw Materials directly traceable to the product.

• Kept in raw materials warehouse until used.

• Becomes part of the finished Product

• Examples wood for furniture is a DM, laptop screens, keyboards, circuit boards etc..

Direct Labor (DL)

Wages and payroll-related costs of workers who physically work on the product.

Included:

• Assembly line workers

• skilled laborers building the product

NOT INCLUDED:

• Factory Supervisors

• Factory Accountants

Manufacturing Overhead (MOH)

All other factory-related costs that are not direct materials or direct labor.

EX: Factory rent or building deprication, factory supervisor salaries, matnience and custodial staff wages, small indirect materials (glues, screw), Property taxes on factory.

Product Costs

All costs incurred inside the factory to manufacture products. These costs are first recorded as inventory (assets) on the balance sheet. Then transferred to the costs of goods sold on the income statement, when the product is sold.

Period Costs

Are all costs incurred outside the factory. This is never recorded as inventory but expensed immediately on the income statement.

Flow of Manufacturing Costs (T- Account Concept)

Step 1: Purchase of raw materials

• Recorded in raw materials inventory (assets)

Step 2: Use raw materials in production

• Raw materials move to work- in- progress inventory

Step 3: Add labor & overhead:

• Direct labor and manufacturing overhead are added to WIP

Step 4: Complete Production:

• Costs move from WIP to Finished Goods Inventory

Step 5: Sell Finished Goods:

• Costs move from finished goods to cost of goods sold (expense).

Costs of Goods Manufactured (COGM) Statement

Internal, confidential, report used by management to evaluate manufacturing performance.

Costs of Goods Manufactured Formula Structure

Beginning Finished Goods Inventory

• Costs of goods manufactured (COGM)

= Cost of Goods Available for Sale

- Ending Finished Goods Inventory

= Costs of Goods sod