 Hello and welcome to this session. This is Professor Farhad. In this session, we're going to learn how to prepare a schedule of cost of goods manufactured and cost of goods sold. Now, you should be familiar with cost of goods sold much much more than cost of goods manufactured. Why? Because if you remember from your financial accounting, the way we compute cost of goods sold is we take beginning inventory. And here I am discussing for a retailer, beginning inventory. Plus what we add to the inventory is what we purchased plus purchases that's going to give us goods available for sale. And from that we will deduct. We count ending inventory and we deduct with deduct ending inventory. And what we get to to cost of goods sold. So let's use some numbers. Let's assume we started with beginning inventory of 20. We purchased $80 worth of merchandise. We had $100 available of goods. Then we counted ending inventory and we find that we still have $10 of ending inventory. It means our cost of goods sold is $90. So this is easy. Why? Because when we purchase inventory, it's just easy to know how much we purchased. What's going to happen is this? For a manufacturing company, they're going to have beginning inventory. Then instead of their own purchase, they're not going to purchase something. They are going to manufacture something. They are going to manufacture something. Therefore, we have to substitute purchases worth cost of goods manufactured. So basically we have to compute the cost of goods manufactured. Why? Because we have to plug it in to find cost of goods sold. And hopefully you remember what's cost of goods manufactured include. It will include direct material, direct labor and manufacturing overhead. So this is basically what goes into the cost of goods manufactured. So let's go ahead and start to compute this. So this is what schedule will show. The schedule we're going to be preparing that's going to show material, labor and overhead. The cost of the material, the cost of the labor and the applied overhead because we are using a normal costing system. And the manufacturing cost associated with goods that were finished during the period. So this is what we're going to show. So the best way to illustrate this is to work an actual example with some numbers. So first remember, we're going to have to determine how much material. So how do we compute how much material? Now if we purchased $100 of material and we consumed $100 of material, then it's easy. Then we use the whole thing. But that's not what usually happened. So we want to know how much material we used. So how do we find out how much material we used? There's the formula. Beginning raw material. Let's assume I'm going to use some numbers. That's we started the beginning raw material with $10. Then we purchased $90 of raw material. We had raw material available for use $100. Then we counted our ending material at the end of the period and we figure out we still have $20 of raw material on hand. It means we consumed $80. So this is the first part. We just find out how much direct material we used. We purchased $90, but we only used up $80. How did we know this? Because what's left is $20 and we started with $10. So this is the material. So we're done with the material. So the direct material used is $80. Then what we have to add to the direct material, we said the direct material is $80. We have to add the labor. Let's assume the labor was $200. It's a labor intensive. And manufacturing overhead, I'm just going to make up a number $100. Direct material, direct labor, and manufacturing overhead gives us $380. And this is the total manufacturing cost. This is the total manufacturing cost. Now, this is what we consumed this period, what we consumed in material, labor, and overhead. Now, what's going to happen is we're going to have a work in process. So this is, we said this is $380. This is $380. Now, what is work in process? What's going to happen in a manufacturing environment? We're going to have partially completed unit from the prior period. And we happen to have $40 worth of partially completed unit from the prior period. Therefore, we added $380, this period, $380 plus $40 equal to $420 of total work in process. Now, are we going to finish everything in work in process? No, we have, we started with $40, added $380, but we're going to have some left. Let's assume what's left is $20. What's left is $20. So we were up to $420. And what's left is $20. So if we take total work in process, $380 minus the $20 will give us cost of goods manufactured of $400. Simply put, we find out this is the equivalent of what we, for a retailer, what they purchased. Here we did not purchase it, we manufactured. So we spent $400 in manufacturing cost, this period, cost of goods manufactured. Now we're not done yet. This is cost of goods manufactured, which is happens to be $400, which is happens to be $400. Now we looked at our finished goods and we had $100 already in finished goods from the prior period. So the $100 that's in the prior period finished goods plus $400, we spent this period. We had $500 available in cost of goods available for sale. Then we counted our ending inventory and we find out we still have $50 in ending inventory. What does that mean? It means our cost of goods sold is $450. And this is the cost of goods sold that's used on the income statement, sales minus cost of goods sold. So we had to go through several steps in order to find cost of goods sold. And the main step, we did everything to figure out this $400. And what goes under the $400, material, labor and overhead, then if we have work in process, we have to add beginning, subtract ending, and we get to cost of goods manufactured. Now I will work another example with this cost of goods manufactured, but let's look at few multiple choice questions that help us get familiar with this process. So let's assume what's the question? The question is what's the total cost of direct material used? We have beginning material, $32,000, that's the beginning. That's the beginning raw material. During the month, $276 were purchased. We add $276 to it. That's going to give us $308 of material available for sale. Account at the end of the month revealed that $28,000 was still present. It means that's the ending. What we do is we subtract the ending, minus $28,000, and by doing so we'll get to the how much we used, which is $280,000. And the answer is $280,000. Let's take a look at the second question. The question reads, what were the total manufacturing cost incurred? What's the total manufacturing cost? It's direct labor plus direct material plus manufacturing overhead. Direct material used in production $280,000. They've just given us the amount, $280,000. Direct labor, I'm sorry, direct material $280,000, not direct labor, direct material is $280,000. Direct labor is $375,000, and $180,000 of manufacturing overhead was added. Just add them up. $835,000, $835,000, $835,000, and that's your answer, $835,000. Okay, let's take a look at this question. What was the cost of goods manufactured during the month? So what's the cost of goods manufactured? This is the last step before we get the cost of goods sold. We have beginning work in process $125,000. So beginning work in process $125,000. Manufacturing cost added to production for the month were $835,000, and this number represents direct material, direct labor, and manufacturing overhead, which is $835,000. Now we have what total work in process for the period, $960,000, $960,000. There were $200,000 of partially finished goods remaining in work in process, so we deduct the $200,000, and that's going to give us what's left $760,000, and that's the answer, and the answer is right here $760,000. Okay, let's take a look at one more question. What is the cost of goods for the month? The cost of goods sold. Okay, so beginning, beginning finished goods inventory. So beginning inventory is $130,000. The cost of goods manufactured is $760,000. That's what we needed to compute, but it's already given to us. That's going to give us $000,000, $890,000, and the ending was $150,000, then we subtract $150,000, and if we subtract $150,000, we come up with $740,000 for cost of goods sold $740,000. And hopefully those exercises help illustrate and consolidate your knowledge about how to prepare cost of goods manufactured and cost of goods sold, cost of goods manufactured and schedule, and cost of goods sold. If you have any questions, any comments, email me or see me in class. If you're studying for your CPA, if you're studying for your CMA exam, make sure to study hard. Those topics are covered on the exam. Good luck.