Managerial Accounting For Dummies

Chapter 4

Figuring Cost of Goods Manufactured and Sold

In This Chapter

Understanding how inventory flows through a business

Applying the outputs formula to discover the amount of direct materials used, the cost of goods manufactured, and the cost of goods sold

Creating a cost of goods manufactured schedule

To earn money, manufacturers must make products for less money than they can sell them for. Similarly, retailers must buy products for less money than they can sell them for. Therefore, measuring the cost of products manufactured or purchased is critically important to understanding a business’s profitability.

This concept explains why cost of goods sold usually appears as the first and largest expense on a manufacturer or retailer’s income statement. How well a company can make or buy goods and then sell them at a profit is fundamentally important to the company’s profitability and success. This fact applies to businesses across the spectrum, from mass-market retailers to elite, high-end retailers to manufacturers.

In this chapter, I show you how a simple formula explains how goods and their costs flow through a business. You can then use the same formula to understand how to ...