Notes on Schedule of Cost of Goods Manufactured and Overhead Flows

Schedule of Cost of Goods Manufactured (COGM) and Related Overheads

  • These schedules are internal management tools, not external financial statements. They support the numbers that appear on financial statements.
  • The Schedule of Cost of Goods Manufactured (COGM) is the more robust, challenging schedule and is used to summarize all manufacturing activity for a period (month, quarter, year).
  • Key flow concept: dollars added to production flow originate in various inventories and accounts, then move through raw materials → work in process (WIP) → finished goods → cost of goods sold (COGS).

Core flow and terminology

  • Raw materials inventory (RM): includes both direct and indirect materials. The purpose is to trace direct materials to WIP and to allocate indirect materials to manufacturing overhead.
  • Direct materials: materials that can be traced to the product.
  • Indirect materials: cannot be traced to a specific product; included in manufacturing overhead.
  • Work in process (WIP) inventory: holds costs of products that are in the production process but not yet finished.
  • Finished goods (FG) inventory: completed goods awaiting sale.
  • Direct materials + Direct labor + Manufacturing overhead (applied) = Manufacturing costs added to production during the period.
  • Beginning balances exist for RM, WIP, FG. Ending balances represent what remains unfinished or unsold.
  • Output from WIP is the Cost of Goods Manufactured (COGM).
  • The Schedule of COGM helps determine what costs moved from WIP to FG during the period.

Direct vs. indirect materials (example discussion)

  • RM available = Beginning RM + Purchases during period.
  • RM used = RM available − Ending RM.
  • Indirect materials used during the period are a subset of RM used and must be allocated to overhead (not double-counted in direct materials).
  • Direct materials used for production = RM used − Indirect materials used.
  • Important note from the example: Indirect materials used = $15,000; Direct materials used = $375,000; Total RM used = $390,000.
  • If problem states all RM are direct, indirect materials may be zero; otherwise, separate direct vs indirect as shown.

Manufacturing overhead (MOH): actual vs. applied

  • MOH includes indirect materials, indirect labor, factory depreciation, utilities, taxes, insurance, etc., accumulated here as actual MOH costs incurred.
  • MOH applied to production is based on a predetermined overhead rate (POHR) times actual activity (e.g., machine hours).
  • Predetermined overhead rate (POHR) example: $25 per machine hour.
  • Actual machine hours used during the period: 19,400 hours.
  • Applied MOH = POHR × Actual hours = POHRimesextActualHours=25imes19,400=485,000.POHR imes ext{Actual Hours} = 25 imes 19{,}400 = 485{,}000.
  • Actual MOH costs incurred (example): $473{,}000$.
  • Overapplied vs. underapplied MOH:
    • Overapplied MOH occurs when Applied MOH > Actual MOH.
    • Underapplied MOH occurs when Applied MOH < Actual MOH.
    • In the example: Applied MOH = $485{,}000$ vs Actual MOH = $473{,}000$ → Overapplied by $12{,}000$.
  • Implications: Over/underapplied MOH affects cost accuracy and pricing. Neither outcome is ideal; management typically targets reducing the gap over time by refining the POHR.
  • Note: MOH does not appear on the balance sheet or income statement as a separate line item; the over/underapplied amount must be disposed of (commonly by adjusting COGS or allocating to WIP/FG/COGS depending on policy).

Example data (Chang Company): Part I — Overhead analysis

  • Predetermined overhead rate (POHR): $25 per machine hour.
  • Actual machine hours: 19,400 hours.
  • MOH applied: 25imes19,400=485,000.25 imes 19{,}400 = 485{,}000.
  • Manufacturing overhead costs incurred (Actual MOH): $473{,}000$.
  • Overapplied MOH: 485,000−473,000=12,000.485{,}000 - 473{,}000 = 12{,}000.
  • Implication: Overapplied MOH by $12{,}000$ means too much overhead was allocated to production relative to actual costs; an adjustment is needed when closing the books.

Example data (Chang Company): Part II — Raw Materials and Direct Materials

  • Beginning Raw Materials (RM): $20{,}000$.
  • RM purchases during the period: $400{,}000$.
  • RM available for use: extBeginningRM+extPurchases=20,000+400,000=420,000.ext{Beginning RM} + ext{Purchases} = 20{,}000 + 400{,}000 = 420{,}000.
  • RM used (total): $390{,}000$.
  • Ending RM: 420,000−390,000=30,000.420{,}000 - 390{,}000 = 30{,}000.
  • Indirect materials used: $15{,}000$ (part of MOH).
  • Direct materials used: extDirectMaterialsUsed=extRMUsed−extIndirectMaterialsUsed=390,000−15,000=375,000.ext{Direct Materials Used} = ext{RM Used} - ext{Indirect Materials Used} = 390{,}000 - 15{,}000 = 375{,}000.
  • Note: In this example, all RM are considered direct unless the problem states otherwise; indirect materials are singled out to be allocated to MOH.

Example data (Chang Company): Part III — Direct labor and MOH applied

  • Direct labor added during the period: $60{,}000$.
  • Manufacturing overhead applied (from Part I): $485{,}000$.
  • Beginning WIP: $40{,}000$.
  • Ending WIP: $70{,}000$.

Schedule of Cost of Goods Manufactured (COGM)

  • Purpose: convert manufacturing costs to the costs of goods completed in the period and transferred to FG.

  • Structure (one common format):

    • Beginning WIP
    • Add: Direct Materials Used
    • Add: Direct Labor
    • Add: Manufacturing Overhead Applied
    • Subtotal (Total Manufacturing Costs to Account For)
    • Less: Ending WIP
    • Equals: Cost of Goods Manufactured (COGM)

  • Chang Company numbers (demonstration):

    • Beginning WIP: $40{,}000$.
    • Direct Materials Used: $375{,}000$.
    • Direct Labor: $60{,}000$.
    • MOH Applied: $485{,}000$.
    • Total Manufacturing Costs to Account For: 40,000+375,000+60,000+485,000=960,000.40{,}000 + 375{,}000 + 60{,}000 + 485{,}000 = 960{,}000.
    • Ending WIP: $70{,}000$.
    • Cost of Goods Manufactured (COGM): 960,000−70,000=890,000.960{,}000 - 70{,}000 = 890{,}000.
    • Interpretation: The $890{,}000$ represents the cost of goods that were completed and transferred to Finished Goods during the period.

  • Raw Materials components (for completeness of the COGM calculation):

    • Beginning RM: $20{,}000$.
    • RM Purchases: $400{,}000$.
    • RM Available: 20,000+400,000=420,000.20{,}000 + 400{,}000 = 420{,}000.
    • RM Used (Total): $390{,}000$.
    • Ending RM: $30{,}000$.
    • Indirect Materials Used: $15{,}000$ (to MOH).
    • Direct Materials Used: $375{,}000$.
    • Note: The RM used figure includes both direct and indirect materials; separating direct materials is essential for accurate COGM calculation.

Schedule of Cost of Goods Sold (COGS) (conceptual)

  • COGS uses Finished Goods inventory. If FG beginning and ending balances are provided, COGS = Beginning FG + COGM − Ending FG.
  • In this example, FG balances were not explicitly given, so COGS cannot be calculated here without those figures.

Practical and analytical implications

  • The overhead allocation method (POHR × actual activity) helps allocate overhead costs to production but can create over/underapplied differences.
  • Overapplied MOH can inflate costs and potentially raise selling prices; underapplied MOH can understate costs and reduce pricing accuracy.
  • The proper handling of MOH (whether to close to COGS, or allocate to WIP/FG/COGS) depends on company policy and GAAP considerations.
  • The flow from RM to WIP to FG to COGS illustrates how costs accumulate and move with production volume, inventory turns, and sales activity.
  • Exam tips highlighted in the lecture:
    • You may abbreviate entries on exams, but ensure readability.
    • Indentation is optional but recommended for readability.
    • A single column with clearly labeled rows/columns is acceptable; avoid excessive dollar sign usage in every line.

Connections to foundational principles

  • Cost accounting traceability: direct materials and direct labor can be traced; MOH is allocated through POHR.
  • Inventory costing: inventories (RM, WIP, FG) reflect costs that are absorbed into product cost as production progresses.
  • Internal decision-making: COGM and MOH analysis informs budgeting, pricing, and efficiency improvements.

Quick reference formulas (LaTeX)

  • Predetermined overhead rate: ext{POHR} = ext{estimated MOH} ig/ ext{estimated machine hours}
  • Applied MOH: extMOHApplied=extPOHRimesextActualMachineHoursext{MOH Applied} = ext{POHR} imes ext{Actual Machine Hours}
  • Over/Underapplied MOH: extOver/UnderappliedMOH=extMOHApplied−extActualMOHext{Over/Underapplied MOH} = ext{MOH Applied} - ext{Actual MOH}
  • Raw Materials Used: extRMUsed=extBeginningRM+extPurchases−extEndingRMext{RM Used} = ext{Beginning RM} + ext{Purchases} - ext{Ending RM}
  • Direct Materials Used: extDirectMaterialsUsed=extRMUsed−extIndirectMaterialsUsedext{Direct Materials Used} = ext{RM Used} - ext{Indirect Materials Used}
  • Cost of Goods Manufactured (COGM):extCOGM=extBeginningWIP+extDirectMaterialsUsed+extDirectLabor+extMOHApplied−extEndingWIPext{COGM} = ext{Beginning WIP} + ext{Direct Materials Used} + ext{Direct Labor} + ext{MOH Applied} - ext{Ending WIP}
  • Cost of Goods Sold (COGS) relation (conceptual):extCOGS=extBeginningFG+extCOGM−extEndingFGext{COGS} = ext{Beginning FG} + ext{COGM} - ext{Ending FG}

Exam readiness reminders

  • Know how to construct the COGM schedule from raw materials, WIP, and MOH data.
  • Be able to calculate whether MOH is over- or underapplied and interpret implications.
  • Understand how direct vs. indirect materials affect inventory accounting and MOH.
  • Remember that MOH adjustments do not appear as a separate line item on financial statements; adjustments flow through COGS or asset/liability accounts depending on policy.
  • Practice reading a problem carefully to identify which inventories are given and which are required to compute COGM and potentially COGS.