The Relationship Between Cost of Goods Sold and Cost of Goods Manufactured

You are the owner of Palantir Publications, and you are in the business of publishing fantasy novels “in the spirit of Lord of the Rings.” Suppose you are given the following information:

Beginning Inventory at Jan. 1
Ending Inventory at Dec. 31
Beginning Work-in-Process (WIP) at Jan. 1
Ending Work-in-Process (WIP) at Dec. 31
Beginning Finished Goods
Ending Finished Goods
Direct Labor (for the little elves working at the printing press)
Handling costs for materials
Rent for the printing press factory
Cost of shipping outgoing book orders
Administrative costs
Advertising costs
Other selling and marketing costs
Net purchases of raw materials

How would you calculate the Cost of Goods Manufactured and the Cost of Goods Sold?

.

.

.

.

[Take a moment to think about this, and then scroll down for the answer]

.

.

.

.

.

.

.

.

.

.

.

Beginning raw materials                                                  $x,xxx
Add: Net purchases of raw materials                               x,xxx

Materials available                                                              x,xxx
Less: Ending materials                                                      (x,xxx)
Materials used in production                                          $ x,xxx

Direct labor                                                                            x,xxx
Manufacturing overhead                             $x,xxx
Factory rent                                                   x,xxx
Factory depreciation                                   x,xxx
  Material handling costs                            $x,xxx

Total Manufacturing Overhead                                        x,xxx

Total Manufacturing Costs                                              $x,xxx
Add: Beginning WIP                                                            x,xxx
Less: Ending WIP                                                               (x,xxx)

Cost of Goods Manufactured                                      $x,xxx
Add: Beginning Finished Goods                                       x,xxx
Less: Ending Finished Goods                                          $x,xxx

Cost of Goods Sold                                                          $x,xxx
Restated more simply:

DM = Beginning RM + Materials purchased – Ending RM
DL
MOH = Factory rent – factory depreciation + material handling costs
Total Manufacturing Costs
WIP = BWIP – EWIP
COGM
FGI = BFGI – EFGI
COGS

 

The above formula is an alternative method of calculating the Cost of Goods Manufactured and the Cost of Goods Sold. I’ve noticed that a lot of online and in-person accounting courses will only teach you one method of calculating for the COGM and COGS, or they will teach you a oversimplified version where each section is not broken down to its components.

You’ll get a good understanding of the general idea of how COGM and COGS are calculated, but come exam time, if you don’t understand that “Finished Goods Inventory” refers to “Beginning Finished Goods Inventory – Ending Finished Goods Inventory,” then that can lead to a lot of headaches.