 in this presentation we will take a look at the manufacturing activities flow we'll take a look at the costs of the manufacturing process and how they flow through the manufacturing process how we will track and organize these costs as we support accounting instruction by clicking the link below giving you a free month membership to all of the content on our website broken out by category further broken out by course each course then organized in a logical reasonable fashion making it much more easy to find what you need than can be done on a u2 page we also include added resources such as excel practice problems pdf files and more like quick books backup files when applicable so once again click the link below for a free month membership to our website and all the content on it go remember that the major difference between the cost of goods sold calculation for a merchandiser a company that purchases and sells inventory and a manufacturer one that makes the inventory is going to be that a merchandiser has these purchases item where they just going to purchase the inventory and the manufacturer is going to have the cost of goods manufactured so this number then becomes the number that we need to determine how are we going to get to this number for if we talk about a merchandiser it's very easy for us to know what the purchases are because that's what we purchase that's pretty straightforward for the manufacturer however the cost of the goods we manufacture is going to include more than just what we purchase more than just raw material it's going to include the things such as direct labor and overhead so we'll take a look at this in three broad categories where we'll have the materials we'll have the production and then we'll eventually be selling the materials we'll make remember that the end process here is of course the production of inventory the ultimate goal to be selling it so most of this that we're thinking about is all kind of balance sheet stuff until we get to the end when we sell it which is going to be similar to a merchandising company where once we're at the end we sell it moving it from the balance sheet to the income statement in the form of cost of goods sold so first we have the materials that we think of and the materials we can think of will run through a similar process as when we just buy and sell inventory from a merchandising company meaning we're gonna have the materials that's already in the warehouse the materials that we have from last month are still there this month we're going to include to those materials what we purchase so we're going to add purchases to those materials and then we're going to subtract from them uh ending materials uh what is still there we're going to count the materials those will be the ending materials and that will give us the materials used now this calculation should look pretty similar to our cost of goods sold you want to be able to understand this calculation because it's the same kind of thing for our cost to get sold for a merchandising company uh and similar to the cost of goods sold for a manufacturer as well note we have the beginning inventory materials we could have we could have a subcategory if we wanted to say materials available for use and then we're going to subtract out the ending materials to give us the materials used uh so this is going to be our purchasing and you can think of this just as us you know purchasing the materials that we have and going through this process to determine the materials that we're going to use within production now once that happens we're going to say okay that's going to go to our production area here this number here is going to be part of production this is what we used to produce but it's not the only thing that we had in production because in production we also had the beginning work in process when we think about production we're thinking about what's in process work in process wip whip is often uh used here so we're going to say well we already had some stuff that was in work in process now and this month according to this calculation we included more materials here based on this calculation to the work in process and so we're going to add that uh in but we're also going to add direct labor and the overhead and these are the two areas that are often overlooked within the production process because when we think of goods and services we often think of just the stuff it's made out of it's made out of plastic it's made of the guitars made out of wood but of course the major components that include that comprise the cost of it are labor and overhead so we have to we have to include that in the production process and these two items are the confusing things to most people because they're going to differ when we record them here uh as to when we had a service company or a company that just buys and sells inventory because some things like utilities on the warehouse some things like depreciation we're not going to expense them as we had in the past we're going to include them in the cost of production we're going to include them in the cost of inventory and that's going to then we're going to subtract out the uh ending work in process what's still there what's not completed yet so we're going to count what's still in the ending work in process and not yet done and that'll give us the cost of goods manufactured so again these two calculations you can see of them of similar they're similar in nature meaning we had beginning work in process and then not purchases but the materials used and all the labor these three items being what we added to it what we made from it we didn't buy it we made it we transferred over this and then we added the labor and the overhead those are all costs that we put into it we could have then uh beginning we could then have a subcategory if we chose to which would be work in process available and then and then subtract out the ending work in process so similar formulas that we have here this time our bottom line number getting to cost of goods manufactured not to be confused with cost of goods sold cost of goods manufactured is what we made during this time period cost of goods sold is is going to be what we actually sold uh during this time period cost of goods manufactured will be used in the calculation for cost of goods sold however which would be the beginning inventory I'm sorry beginning the finished goods inventory so now we're looking at the the goods that are done now the finished goods inventory and then we're going to add to it the cost of goods manufactured instead of as we would for a merchandiser a company that just purchases and sells inventory where this would be purchases so this is the differing number here between those two that's going to give us the goods available for sale just a subcategory this is what we could have sold during the time period this is our calculation of cost of goods sold that we saw prior and then that's going to give us our ending finished good and then we're going to subtract from that our ending finished goods inventory which we could get from a physical account to finally get the cost of goods sold now notice we have the sales item here the only the only area here that's going to be on the income statement is the cost of goods sold and it's not the sales item we don't know what we sold it for that what we we would but these this flow doesn't track the sales price the sales price has nothing to do directly with the cost of the goods sold we might use the cost to derive the sales price but this remember we're tracking the cost so when we sell something we're gonna where if it's if it's a perpetual system we're gonna we're gonna debit cash or debit accounts receivable credit sales revenue sales will be recorded that's the part that's not here we're also going to debit cost of goods sold the expense and reduce inventory and that's in credit inventory and that's what we are tracking here this is going to be the cost of goods sold the expense portion of the sales we make when we make a sale we have the related expense of cost of goods sold note that this expense this one time that we're finally hitting the income statement is comprised of all this activity that we've done the direct materials are included in it the direct labor is included in it the overhead is included in it all that stuff that we've been tracking this whole time and haven't been putting on the income statement at all we've just been putting it on the balance sheet as just lumping it in together as part of inventory is finally being expensed all together as we sell it in the form of cost of goods sold