Hi everyone! In this video we're going to be showing two examples of how to
calculate cost of goods manufactured and cost of goods sold using T accounts. So
here we're given some simple information about our three inventory accounts that
a manufacturing company would have, as well as some information on direct labor,
overhead and material purchases. So what we're going to do is just draw our T
accounts for our three inventory accounts. So we have materials, we have
work in process, and we have finished goods. I'm just gonna label everything that I know,
these are all inventory accounts so I know they're gonna carry a normal debit
balance. So that's my beginning and ending for each one and I also know that
cost of goods manufactured appears right here and it moves into finished goods
and I also know that once we sell a finished good, it becomes cost of goods
sold. I also know that used direct materials go right into process. We also
have direct labor and overhead. So all three of our product costs appear in
work in process. If we have any purchases, they would go on the debit side of
materials as well as Freight in if we have any Freight in, but it doesn't look
like in this problem we do, but we have to be cognizant of that. So now I'm just
gonna fill in the information I'm given. So beginning materials, it tells me in
the problem. So the beginning balances are in that column. So beginning
materials are 22,000. Beginning work in process they tell me
is 38,000 and beginning finish goods they tell me is 18,000
and they also tell me the ending balances for each one as well.
That would be the end of your balances. So for materials is 26,000.
For work in process they tell me it's 30,000 and for
finished goods it's 23,000. They also tell me material
purchases are 75,000. They tell me direct labor is 82,000
and I also have overhead calculated for me at 39,000.
So now I can just figure out what's missing. So if I know that
beginning materials is 22,000 and I had purchases of 75,000
and I ended the period with 26,000. I must have
used $71,000 in direct materials which is getting moved
directly into working process. Now remember our discussion about materials.
It also encases indirect materials, but we don't really know where that's going
as of yet, eventually it's going to become part of overhead. So for right now,
these are all direct materials and they're moving directly into process. So
now we have all of our debits in work in process, they're beginning plus all of my
product cost minus an ending work in process of 30,000. I must have
cost of goods manufactured of 200,000 which moves directly in to
finish goods. Now that I have my beginning, my beginning finish goods plus
cost of goods manufactured less ending finished goods of 23,000,
I find cost of goods sold to be $195,000
Okay so let's take this a step further if I were to ask you if 975
units were sold, how many did we actually produce? So I'd like for
you to push pause on your player right now and see if you can figure out the
answer to this question. Okay if 975 units were sold how
many units were produced and then once you find the answer come back and we'll
take a look at it together.
So the key here is that we know that inventory accounts house the cost of our
inventory: the cost of our materials, the cost of our work in process, which
includes labor and overhead and materials and then of course the cost of
our finished product. So this number is telling us the cost of what we produced,
but we're trying to figure out how many we produced, but we know the cost of what
we sold was 195,000 and we know we sold 975
units. So if we take the cost of goods that we sold
which was $195,000 and divide that by the
number of units that we sold, we find that each unit cost $200
to produce. If we know that, then we can divide the number of or the cost of what
we produced divided by the cost of each unit produced, gives us the number of
units that we actually produced. So the total cost of what we produce was $200,000
and we know that each unit cost us $200
to produce. So if we divide the two we find that we actually produced a
hundred, I mean we actually produced 1,000 units, but only sold 975.
Okay let's try one more. Here we have Couger Lamp
manufacturing and provided the following information for the year in December
31st. So it's very similar the one we just did, I'm giving you the beginning
and ending of your three inventory accounts, but I'm not giving you overhead
here. I do give you direct labor just like we did in the last problem, but I'm
giving you a list of other things and in this problem you actually have to figure
out what counts as overhead and what does not in your calculation of cost of
goods manufactured and cost of goods sold. So I'd like you to again to push
pause on your player, draw your three inventory accounts just like we did
before, put all the information that you're given that you know where it goes
put it in the t-accounts, and then look at this list of stuff and
if you can come up with what makes up overhead and then calculate cost of
goods manufactured and cost of goods sold. Once you think you got it, come back
and we'll take a look at the answer together.
All right so let's first take a look at what is gonna make up overhead before we
even get started because that's going to help us figure out our cost of goods
manufactured and cost of goods sold. So we're gonna look at this other
information right here. So all these things here we're gonna look at these
and what makes up overhead? So remember overhead is made up of indirect
materials, indirect labor, and other overhead. So anything to do with the plant
or the factory that would be included as part of overhead. So the first one is
depreciation on the plant building and equipment. So we see the word plant, we
don't even have to think about it, it is overhead. Okay so that's one of them.
Materials purchases, well we know that purchases of materials goes in the
materials account. So that's not part of overhead. Insurance on the plant, so again
there's that keyword we don't have to think about it that is overhead. Sales
salaries expense, so this is the selling of the product not the making of the
product or the creating of the product. So this is actually a selling expense
which is a period cost which is expensed when incurred, so this is not overhead.
Repairs on maintenance on the plant, so again keyword plant, we know it's
overhead don't even have to think about it. Indirect labor, that's one of the main
three components of overhead, so indirect materials and direct labor and other
overhead. So that's definitely overhead. Direct labor is direct labor. Then
the last one is administrative expense. Well anything to do with administration
they don't create a product, that's over there in the admin building not here in
the factory. So that is also a selling and administration expense which is
expensed when incurred, so therefore it's a period cost. All right so that is not
overhead either. So we have 15,000 plus 20,000 plus 5,000 plus 30,000. So I think
that comes out to $70,000 for overhead. So let's look at our three t accounts
now. So you should have found materials used
to be a $180,000 which move directly into work
in process as direct materials for our purposes right now, but remember in
future this may be made up of indirect materials as well once we move forward,
but for our purposes right now it's just direct materials moving into work in
process. We found our overhead to be $70,000 in the prior
screen. That gives us costs of goods manufactured of 405,000,
moving directly into finished goods. Then we can solve for our cost of
goods sold and you should have found that to be $402,000.
So don't forget about the lecture notes and other videos that you can
watch on my website, www.TheAccountingDr.com You also might find other
helpful information there from prior classes and as well as future classes.
There's also accounting games you can play there as well