Manufacturing and Nonmanufacturing Costs

4.6. Finished goods inventory, T-accounts and related accounting

After raw materials have gone through the entire production process, they become finished goods:

Finished goods are completed manufactured items that a company has produced for sale to customers.

The Finished Goods Inventory account shows the following information (also refer to the T-account illustration below):

  • Cost of finished goods inventory available at the beginning of an accounting period (i.e. beginning balance as a debit because inventory is an asset account). The balance represents finished goods available for sale at the beginning of the period.
  • Cost of goods manufactured (COGM) that were transferred from work-in-process inventory to finished goods during the accounting period (debit side).
  • Cost of goods sold (COGS) during the period (credit side).
  • Cost of finished goods available at the end of the account period.

Illustration 14: Finished goods inventory T-account

Finished goods inventory T-account

In our example, Friends Company will classify completed valves ready to be sold as finished goods. As we stated earlier, at the end of March 20X9 Friends Company finished manufacturing valves that cost $8,600, and the journal entry to record that was as follows (the entry for the Work-in-Process is repeated here from an earlier discussion for convenience):

8) Transfer finished goods from work-in-process:

Account Titles

Debit

Credit

Finished Goods Inventory

8,600

 

      Work-in-Process Inventory

 

8,600

To continue our example, let's assume that during March 20X9 Friends Company sold on account valves costing $7,900, and the sales price was $15,000. The $7,900 represents the Cost of Goods Sold (COGS). The journal entry to record the cost of goods sold is presented below (also refer to the T-account illustration below):

9) Record cost of goods sold:

Account Titles

Debit

Credit

Cost of Goods Sold (COGS)

7,900

 

      Finished Goods Inventory

 

7,900

Let's look at the Finished Goods Inventory T-account. Assume that at the beginning of March Friends Company had a balance of $6,000 in this account:

Illustration 15: Friends Company finished goods inventory T-account

Friends Company finished goods inventory T-account

From other tutorials, we can recall that two entries are posted when finished goods are sold:

  • One to record the cost of goods sold
  • The other one to record the sales revenue

The COGS entry is shown above (entry # 9). The sales revenue journal entry is presented below:

10) Record sales revenue:

Account Titles

Debit

Credit

Accounts Receivable

15,000

 

      Sales Revenue

 

15,000

Note that COGS decreases (credits) the Finished Goods Inventory account. COGS is recorded in the income statement below the Sales Revenue line; it is subtracted from Sales Revenue to calculate Gross Margin. We will discuss the income statement of a manufacturing company in more detail later in this tutorial.

4.7. Cost accounting cycle with T-accounts (summary of how costs flow)

The following illustration shows the full cost accounting cycle (from raw materials to finished goods) for Friends Company during March 20X9. For simplicity, T-accounts only show activity for the month and don't show beginning and ending account balances.

Illustration 16: Cost flow from raw materials to work-in-process to finished goods

Cost flow from raw materials to work-in-process to finished goods

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