How to Prepare a Schedule of Cost of Goods Manufactured
Preparing a schedule of cost of goods manufactured is a crucial step in understanding the financial health of a manufacturing company. This schedule provides a detailed breakdown of the costs associated with producing goods, which is essential for making informed business decisions. In this article, we will guide you through the process of preparing a schedule of cost of goods manufactured, ensuring that you have a clear understanding of the components involved and how to calculate them accurately.
Understanding the Components of Cost of Goods Manufactured
The cost of goods manufactured (COGM) includes several key components that need to be considered:
1. Direct Materials: These are the raw materials used in the production process. It is important to track the cost of these materials to ensure that they are accounted for accurately.
2. Direct Labor: This includes the wages paid to employees directly involved in the production process. It is crucial to differentiate between direct labor and indirect labor to avoid overestimating the COGM.
3. Manufacturing Overhead: This category encompasses all the indirect costs associated with the production process, such as factory rent, utilities, and depreciation of machinery.
4. Work in Process (WIP): This represents the value of goods that are currently being worked on but have not yet been completed. It is important to track the value of WIP to ensure that it is included in the COGM.
Steps to Prepare a Schedule of Cost of Goods Manufactured
To prepare a schedule of cost of goods manufactured, follow these steps:
1. Calculate the total cost of direct materials used in the production process. This can be obtained by adding the cost of raw materials purchased during the period to the beginning and ending inventory of raw materials.
2. Determine the total cost of direct labor. This can be calculated by multiplying the number of labor hours worked by the labor rate per hour.
3. Calculate the manufacturing overhead. This can be done by summing up all the indirect costs associated with the production process.
4. Add the beginning WIP to the total cost of direct materials, direct labor, and manufacturing overhead. This will give you the total manufacturing cost.
5. Subtract the ending WIP from the total manufacturing cost to obtain the cost of goods manufactured.
6. Finally, prepare the schedule of cost of goods manufactured by listing the components and their respective costs.
Conclusion
Preparing a schedule of cost of goods manufactured is an essential task for any manufacturing company. By understanding the components involved and following the steps outlined in this article, you can ensure that your COGM is calculated accurately. This will enable you to make informed decisions regarding pricing, production, and inventory management, ultimately contributing to the financial success of your business.
