The allocation of fixed overheads to work-in-progress and finished goods
ID:CVADI

Video Overview

In a manufacturing entity cost of sales is calculated as follows: First, we calculate the direct materials that were issued to the factory. The direct materials issued to the factory is then transferred to the work-in-progress inventory account. It is then added to the direct labour costs and factory overheads costs. This gives us the total production costs that were issued to work-in-progress for the year. Any partially completed units or costs in the factory left over from the previous period is then added to the current periods production cost, being the opening balance of work-in-progress. Any partially completed units in the factory at the period end are then subtracted from the production costs, being the closing balance of work-in-progress. This then gives us the cost of production of finished goods for the period. This amount is transferred out of work-in-progress to finished goods inventory account. Any unsold finished goods from the previous period are then added to this figure, being the opening balance of finished goods, and any unsold finished goods at the end of the current period are then subtracted from this figure, being the closing balance of finished goods. This then gives us cost of sales for the current period, which is transferred out of finished goods to the cost of sales account. In this tutorial we are going to specifically look at the allocation of factory overheads to work-in-progress and finished goods, in the above flow of goods in the manufacturing process.