Lopez Corporation incurred the following costs while manufacturing its product. Materials used in product $120,000 Advertising expense $45,000 Depreciation on plant $60,000 Property taxes on plant $14,000 Property taxes on store $7,500 Delivery expense $21,000 Labor costs of assembly-line workers $110,000 Sales commissions $35,000 Salaries paid to sales clerks $50,000 Factory supplies used $23,000 Work in process inventory was $12,000 at January 1 and $15,500 at December 31. Finished goods inventory was $60,000 at January 1 and $45,600 at December 31. Instructions (a) Compute cost of goods manufactured. (b) Compute cost of goods sold.
The correct answer and explanation is :
(a) Cost of Goods Manufactured (COGM)
To compute the cost of goods manufactured (COGM), we need to use the following formula:
[
\text{COGM} = \text{Total Manufacturing Costs} + \text{Beginning Work in Process Inventory} – \text{Ending Work in Process Inventory}
]
Step 1: Calculate Total Manufacturing Costs
Total manufacturing costs include:
- Materials Used: $120,000
- Labor Costs of Assembly-line Workers: $110,000
- Factory Supplies Used: $23,000
- Depreciation on Plant: $60,000
- Property Taxes on Plant: $14,000
Total Manufacturing Costs:
[
120,000 + 110,000 + 23,000 + 60,000 + 14,000 = 327,000
]
Step 2: Calculate Cost of Goods Manufactured (COGM)
Next, we compute the COGM by adding the beginning work in process inventory and subtracting the ending work in process inventory.
- Beginning Work in Process Inventory: $12,000
- Ending Work in Process Inventory: $15,500
[
\text{COGM} = 327,000 + 12,000 – 15,500 = 323,500
]
Thus, the Cost of Goods Manufactured is $323,500.
(b) Cost of Goods Sold (COGS)
To compute the cost of goods sold (COGS), we use the following formula:
[
\text{COGS} = \text{Beginning Finished Goods Inventory} + \text{COGM} – \text{Ending Finished Goods Inventory}
]
Step 1: Apply the Formula
- Beginning Finished Goods Inventory: $60,000
- COGM: $323,500 (from part a)
- Ending Finished Goods Inventory: $45,600
[
\text{COGS} = 60,000 + 323,500 – 45,600 = 337,900
]
Thus, the Cost of Goods Sold is $337,900.
Explanation
- Cost of Goods Manufactured (COGM) refers to the total cost incurred by a company to produce goods during a period. This includes all direct costs like materials, labor, and manufacturing overhead (depreciation, property taxes, etc.). In this case, after calculating the total manufacturing costs and adjusting for changes in work in process inventory, we get a COGM of $323,500.
- Cost of Goods Sold (COGS) is the direct cost of producing the goods that have been sold during the period. To calculate COGS, we start with the beginning inventory of finished goods, add the COGM, and subtract the ending finished goods inventory. This reflects the cost of the goods that were sold during the period, which, in this case, is $337,900.