Question

Describe the relations among the income statement, the schedule of cost of goods manufactured, and a detailed listing of factory overhead costs

Answer 1

The cost of goods manufactured schedule is used to calculate the cost of producing products for a period of time. The cost of goods manufactured amount is transferred to the finished goods inventory account during the period and is used in calculating cost of goods sold on the income statement.

The cost of goods sold then appears in the income statement of the reporting entity, where it is subtracted from sales to determine the gross margin. This calculation can be avoided when a business uses standard costing. If so, the standard cost of each unit sold is aggregated to arrive at the cost of goods sold.

Factory overhead is the costs incurred during the manufacturing process, not including the costs of direct labor and direct materials. Factory overhead is normally aggregated into cost pools and allocated to units produced during the period. It is charged to expense when the produced units are later sold as finished goods or written off. The allocation of factory overhead to units produced is avoided under the direct costing methodology, but is mandated under absorption costing. The allocation of factory overhead is required when producing financial statements under the dictates of the major accounting frameworks. Examples of factory overhead costs are:

• Production supervisor salaries

• Quality assurance salaries

• Materials management salaries

• Factory rent

• Factory utilities

• Factory building insurance

• Fringe benefits

• Depreciation

• Equipment setup costs

• Equipment maintenance

• Factory supplies

• Factory small tools charged to expense

• Insurance on production facilities and equipment

• Property taxes on production facilities

The range of possible factory overhead costs can be quite extensive, depending upon the size and complexity of a factory operation and the level of detail at which costs are recorded.