Which inventory account consists of manufacturing cost of goods that are complete?

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What is Raw Materials Inventory?

Raw materials inventory is the total cost of all component parts currently in stock that have not yet been used in work-in-process or finished goods production. There are two subcategories of raw materials, which are:

• Direct materials. These are materials incorporated into the final product. For example, this is the wood used to manufacture a cabinet.

• Indirect materials. These are materials not incorporated into the final product, but which are consumed during the production process. For example, this is the lubricant, oils, rags, light bulbs, and so forth consumed in a typical manufacturing facility.

Presentation of Raw Materials Inventory

The cost of raw materials on hand as of the balance sheet date appears in the balance sheet as a current asset. Raw materials may be aggregated into a single inventory line item in the balance sheet that also includes the cost of work-in-process and finished goods inventory.

Accounting for Raw Materials Inventory

Raw materials of all types are initially recorded into an inventory asset account with a debit to the raw materials inventory account and a credit to the accounts payable account. When raw materials are consumed, the accounting treatment varies, depending on their status as direct or indirect materials. The accounting is:

• Direct materials. Debit the work-in-process inventory account and credit the raw materials inventory asset account. Or, if the production process is brief, bypass the work-in-process account and debit the finished goods inventory account instead.

• Indirect materials. Debit the factory overhead account and credit the raw materials inventory asset account. At the end of the month, the ending balance in the overhead account is allocated to the cost of goods sold and ending inventory.

Raw materials may sometimes be declared obsolete, possibly because they are no longer used in company products, or because they have degraded while in storage, and so can no longer be used. If so, they are typically charged directly to the cost of goods sold, with an offsetting credit to the raw materials inventory account.

The statement of cost of goods manufactured supports the cost of goods sold figure on the income statement.  The two most important numbers on this statement are the total manufacturing cost and the cost of goods manufactured. Be careful not to confuse the terms total manufacturing cost and cost of goods manufactured with each other or with the cost of goods sold.

Total Manufacturing Cost includes the costs of all resources put into production during the period (meaning, the direct materials, direct labor and overhead applied). Cost of goods manufactured consists of the cost of all goods completed during the period. It includes total manufacturing costs plus the beginning work in process inventory minus the ending work in process inventory. Cost of goods sold are the costs of all goods SOLD during the period and includes the cost of goods manufactured plus the beginning finished goods inventory minus the ending finished goods inventory.  Cost of goods sold is reported as an expense on the income statements and is the only time product costs are expensed.  This chart will summarize the formulas you will need:

NoteLook at the following example.  Farside Manufacturing makes calendars and books.  The schedule (or statement) of cost of goods manufactured follows:

Note how the statement shows the costs incurred for direct materials, direct labor, and manufacturing overhead. The statement totals these three costs for total manufacturing cost during the period. When adding beginning work in process inventory and deducting ending work in process inventory from the total manufacturing cost, we obtain cost of goods manufactured or completed. Cost of goods sold does not appear on the cost of goods manufactured statement but on the income statement.

To make the manufacturer’s income statement more understandable to readers of the financial statements, accountants do not show all of the details that appear in the cost of goods manufactured statement. Next, we show the income statement for Farside Manufacturing Company. Notice the relationship of the statement of cost of goods manufactured to the income statement.

The cost of goods manufactured appears in the cost of goods sold section of the income statement. The cost of goods manufactured is in the same place that purchases would be presented on a merchandiser’s income statement. We add cost of goods manufactured to beginning finished goods inventory to derive cost of goods available for sale. This is similar to the merchandiser who presents purchases added to beginning merchandise to derive goods available for sale.

Note: Cost of goods available for sale represents all items completed and read to sell during the period.  It is calculated as beginning finished goods inventory + cost of goods manufactured from the statement of cost of goods manufactured.  Income from operations is calculated as Gross Margin (also called Gross Profit) – total operating expenses.

Which inventory account consists of the cost of items for which the manufacturing process is complete?

Which inventory account consists of products currently being processed?

What type of account is cost of goods manufactured?

What is cost of finished goods inventory?