How is the cost of goods manufactured calculated?

The calculation of the cost of goods manufactured involves determining the total production costs incurred during a specific period and adjusting for the inventory levels throughout that period. The correct method includes starting with the beginning Work in Process (WIP) inventory, adding the total manufacturing costs incurred during the period—such as direct materials, direct labor, and manufacturing overhead—and then subtracting the ending WIP inventory. This formula effectively captures the costs of goods that were completed and transferred out of production to be sold.

Beginning WIP represents the costs of partially completed goods at the start of the period. By adding total manufacturing costs, you account for all expenses incurred to produce new goods. Finally, subtracting the ending WIP removes the costs associated with goods that are still in production, ensuring that only the costs of completed goods are included in the total. This calculation provides a clear picture of the total cost associated with the goods that were manufactured during the period.