Cost of goods manufactured is based on the amount of work-in-process completed. This work-in-process includes costs of direct materials put into production, plus direct labor and overhead.
To determine work-in-process, you enter the number of units or costs into the same outputs formula that you use to calculate direct materials put into production.
Number of units manufactured
Knowing how many units of direct materials each finished product requires helps you figure out how many units you manufacture and how much those units cost. For example, to make one gallon of chocolate milk, you need 0.950 gallons of whole milk and 0.05 gallons of chocolate syrup.
To compute the number of units manufactured, start with the number of units of work-in-process in beginning inventory (Beginning). Add the number of units of direct materials put into production (Inputs) and then subtract the number of units of work-in-process in ending inventory (Outputs).
Suppose that your chocolate milk factory started the year with 200 gallons of unmixed ingredients in the blenders. During the year, another 4,000 gallons of ingredients were taken out of storage and poured into the blenders. At the end of the year, 300 gallons of unmixed ingredients were still in the blenders (planned for production next year). Plug these numbers into the outputs formula:
The factory completed 3,900 gallons of chocolate milk during the period. From here, you’re ready to figure out the total cost of chocolate milk manufactured and its cost per unit.
Cost of goods manufactured
Direct materials, direct labor, and overhead all get input into the production process. Therefore, to compute the cost of goods manufactured, think about all product costs, including not only direct materials but also direct labor and overhead.
Consider the cost of goods manufactured for the chocolate milk factory. Your beginning inventory cost $2,000. The factory put $10,000 worth of direct materials into production and spent $5,000 on direct labor and another $4,000 on overhead. At the end of the year, you counted $3,000 worth of ending inventory. Feeling overwhelmed? Hang in there! To compute cost of goods manufactured, just apply the outputs formula:
This result tells you that the factory’s output of chocolate milk during the year cost $18,000.