Types of Inventory

 Types of inventories in each organization are discussed as

follows.
1. Inventories of manufacturing Business:
a) Raw materials inventory: This refers to all materials
purchased to be used in the production process.
 The cost of the raw material is composed of:
 The invoice price of the material
 The transportation cost of the material
 The insurance in transit cost of the material
 Loading and unloading costs
 All other costs incurred on the raw material to make ready
for consumption.
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b) Work in Process Inventory: all items that are still in process on
the date of reporting
 Items not completed to be reported on finished goods inventory.
 The cost of work in process inventory is composed of:
 The cost of raw material changed to production,
 The cost of labor incurred on items in process, and
 The manufacturing overhead cost
c) Finished Goods Inventory:
 When the manufacturing process is completed, finished products
will be sent to warehouse so that they will be available for
selling.
 The cost is composed of:
 Applicable cost of raw materials
 Applicable cost of labor and
 Applicable cost of manufacturing overheads 2
2. Merchandising sector companies:
 They purchase and then sell tangible products without
changing their basic form.
 They hold only one type of inventory, which is the product
in its original purchased form.
3. Service Sector Companies:
 Service sector companies provide only services or intangible
products to their customers and hence do not hold
inventories of tangible products for sale.

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Summary of manufacturing costs flows and their classification

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Summary of merchandising cost flows and their cost classification

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Recording of Costs and Schedule of Costs of Products.
Cost of Goods Sold Schedule
Example 1
Direct materials:
Beginning raw materials inventory . . . . . . . . $ 60,000
Add: Purchases of raw materials . . . . . . . . . . . 400,000
Raw materials available for use . . . . . . . . . . . . 460,000
Deduct: Ending raw materials inventory . . . . … 50,000
Raw materials used in production . . . . . . . . . . . . . . . . $ 410,000
Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000
Manufacturing overhead:
Insurance, factory . . . . . . . . . . . . . . . . . . . . . . …... 6,000
Indirect labor . . . . . . . . . . . . . . . . . . . . . . . . . . . .100,000
Machine rental . . . . . . . . . . . . . . . . . . . . . . . . … . .50,000
Utilities, factory. . . . . . . . . . . . . . . . . . . . . . . . . ... .75,000
Supplies factory. . . . . . . . . . . . . . . . . . . . . . . . … . .21,000
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 Depreciation, factory . . . . . . . . . . . . . . . . . . . . . . 90,000
Property taxes, factory . . . . . . . . . . . . . . . . . . . . . 8,000
Total overhead costs . . . . . . . . . . . . . . . . . . . . . . . . ….. . . . .
350,000
Total manufacturing costs:. ……….. . . . . . . . . . . . . . . . ….. . .
820,000
Add: Beg work in process inventory . . . . . 90,000 ……..
…...90,000
Deduct: End WIP inventory . . . . . . . . . …………………..…..
60,000
Cost of goods manufactured . . . . . . . . . . …... . . . . . . . . . . $
850,000
+ Beginning Finished Goods Inventory . . . . . . . . . . . . . . . . .
125,000
- Ending Finished Goods Inventory . . . . . . . .
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Illustration:
 Prepare Cost of Goods Sold statement and Income statement
 The following information has been taken from the accounting
records of AAA Corporation for last year:
Selling expenses . . . . . . . . . . . . . . . . . . . . . . . . . . $ 140,000
Raw materials inventory, January 1 . . . . . . . . ….. . . $ 90,000
Raw materials inventory, December 31 . . . . . . ….. $ 60,000
Purchases of raw materials . . . . . . . . . . . . . . . … . $ 750,000
Utilities, factory . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 36,000
Direct labor cost . . . . . . . . . . . . . . . . . . . . . . . . . . $ 150,000
Depreciation, factory . . . . . . . . . . . . . . . . . . . . . . $ 162,000
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,500,000
Insurance, factory . . . . . . . . . . . . . . . . . . . . . . . . . $ 40,000
Supplies, factory . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,000

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Administrative expenses . . . . . . . . . . . . . . . . . . …. $ 270,000
Indirect labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 300,000
Maintenance, factory . . . . . . . . . . . . . . . . . . . . .. . ... $ 87,000
Work in process inventory, January 1 . . . . . . ….. . . $ 180,000
Work in process inventory, December 31 . . . …. . . .$ 100,000
Finished goods inventory, January 1 . . . . . . . . ……. . $ 260,000
Finished goods inventory, December 31. . . . …... . . $ 210,000
Required:
1. Prepare a schedule of cost of goods manufactured.
2. Compute the cost of goods sold.
3. Prepare an income statement.

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1. Cost of Goods Manufactured
AAA Corporation
Schedule of Cost of Goods Manufactured
For the Year Ended December 31
Direct materials:
Raw materials inventory, January 1 . . . . . . . . .. . . . . . .$ 90,000
Add: Purchases of raw materials . . . . . . . . .. . . . . . . . . 750,000
Raw materials available for use. . . . . . . . . .. .. . . . . . . . 840,000
Deduct: Raw materials inventory, December 31 . . . . . 60,000
Raw materials used in production . . . . . . . . . . . . . ………... . . $
780,000
Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . …. . . . . …… ...
150,000
Utilities, factory . . . . . . . . .. . . . . . . . . . . . . . . . . . . . 36,000
Depreciation, factory . . . . . . .. . . . . . . . . . . . . . . . . 162,000
Insurance, factory . . . . . . . . . . . . . .. . . . . . . . . . . . . . 40,000
Supplies, factory . . . . . . . . . . . .. . . . . . . . . . . . . . . . . 15,000 11
Indirect labor . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . 300,000
Maintenance, factory . . . . . . . . . . . . . . .. . . . . . . . . . .87,000
Total manufacturing overhead costs. . . .. . . . . . . ……………….. .
640,000
Total manufacturing cost . . . . ……………. . . . . . . . . . . . . . . . .
1,570,000
Add: Work in process inventory, January 1 . . . . . . . 180,000
Deduct: Work in process inventory, December 31 . . 100,000
Cost of goods manufactured . . . . . . …………. . . . . . . . . . . . . $
1,650,000
2. Cost of Goods Sold
Cost of goods manufactured . . . . . . …………. . . . . . . . . . . . . $
1,650,000
Add: Finished goods inventory, January 1 . . . . . . . . . . . . . . ….$
260,000
Goods available for sale . . . . . . . . . . . . . . . . . . . . . . ……….. . .
1,910,000
Deduct: Finished goods inventory, December 31 . . ……………. . 12

210,000
3. Income Statement
AAA Corporation
Income Statement
For the Year Ended December 31
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,500,000
Cost of goods sold . . . .. . . . . . . . . . . . . . . . . . . . . . . . 1,700,000
Gross margin . . . . . . . .. . . . . . . . . . . . . . . . . . . . . .. . . 800,000
Selling and administrative expenses:
Selling expenses . . . . . . . . . .. . . .. . . . .. . . $ 140,000
Administrative expenses . . . . . . .. . . . . . . . . 270,000 … 410,000
Net operating income . . . . . . . . .. . . . . . . . . . . . . . . . . $ 390,000

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Exercise:
Use the following data and compute CGS for Grey company
Direct labor cost . . . . . . . . . . . . . . . . . . . . . . . . . .$70,000
Purchases of raw materials . . . . . . . . . . . . . . . . . $118,000
Indirect labor . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$30,000
Maintenance, factory equipment . . . . . . . . . . . . $6,000
Advertising expense . . . . . . . . . . . . . . . . . . . . . . .
$90,000
Insurance, factory equipment . . . . . . . . . . . . . . . $800
Sales salaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$50,000
Rent, factory facilities . . . . . . . . . . . . . . . . . . . . . .
$20,000
Supplies factory . . Beginning
. . . . . . . . .of. .the
. . .Year
. . . . . . . . .End of the Year
. . $4,200
Raw materials
Depreciation, office equipment $ 7,000 $15,000
. . . . . . . . . . . . . $3,000
Work in process $10,000. . . . . . . . . . . . $19,000 $5,000
Depreciation, factory equipment
Finished goods $20,000 $35,000
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Solution
Grey Company
Schedule of Cost of Goods Manufactured
Direct materials:
Raw materials inventory, beginning..................$ 7,000
Add: Purchases of raw materials .....................118,000
Raw materials available for use........................125,000
Deduct: Raw materials inventory, ending..........15,000
Raw materials used in production.....................................$110,000
Direct labor............................................................................70,000
Manufacturing overhead:
Indirect labor ...................................................30,000
Maintenance, factory equipment ......................6,000
Insurance, factory equipment ..............................800
Rent, factory facilities.......................................20,000
Supplies factory .................................................4,200
Depreciation, factory equipment ....................19,000
Total overhead costs .............................................................80,000
Total manufacturing costs............................................................260,000
Add: Work in process, beginning .......................10,000
Deduct: Work in process, ending..........................5,000
Cost of goods manufactured .....................................................$265,000
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Cost of Goods Sold
Cost of goods manufactured .............................. $265,000
Add: Finished goods inventory, beginning ............. $ 20,000
Goods available for sale........................................ 285,000
Deduct: Finished goods inventory, ending ........ 35,000
Cost of goods sold.................................................. $250,000

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End of Chapter- 2

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