Chapter 3

cost of goods manufactured

-the amount transferred from WIP to finished goods -includes manufacturing costs associated with units of product that were finished during the period

schedule of cost of goods sold

A schedule that contains three elements of product costs—direct materials, direct labor, and manufacturing overhead—and that summarizes the portions of those costs that remain in ending Finished Goods inventory and that are transferred out of Finished Goods into Cost of Goods Sold.

schedule of cost of goods manufactured

A schedule that contains three elements of product costs—direct materials, direct labor, and manufacturing overhead—and that summarizes the portions of those costs that remain in ending Work in Process inventory and that are transferred out of Work in Process into Finished Goods.

Summary of underapplied and overapplied costs

Manufacturing overhead costs are applied to jobs using a predetermined overhead rate. Because the predetermined overhead rate is based on estimates, the actual overhead cost incurred during a period may be more or less than the amount of overhead cost applied to production. Such a difference is referred to as underapplied or overapplied overhead. The underapplied or overapplied overhead for a period can either be closed out to COGS or closed proportionally to WIP, Finished Goods, and COGS. When overhead is underapplied, manufacturing overhead costs have been understated and therefore inventories and/or COGS must be adjusted upwards. When overhead is overapplied, manufacturing overhead costs have been overstated and therefore inventories and/or COGS must be adjusted downwards.

overapplied overhead

example: overapplied by $5000 because the applied cost $95,000 was $5000 more than the actual cost of $90,000.

underapplied overhead

example: underapplied by $5000 because the applied cost $90,000 was $5000 less than the actual cost of $95,000.

summary of the flow of costs for manufacturers

raw materials purchased from suppliers are stored in raw materials inventory until requisition for use in production. Direct materials are added to WIP along with direct labor and applied overhead. Once units of production are complete, their manufacturing costs are transferred from WIP to finished goods. When units of production are sold their associated costs are transferred from Finished Goods to COGS on the income statement. Selling and admin expenses are not attached to units of production. Instead, they are recorded as expenses on the income statement as incurred.