Final answer:
A schedule of cost of goods manufactured is prepared by calculating direct materials, direct labor, and manufacturing overhead, adjusting for inventory changes to find the total manufacturing costs, and including changes in work in process inventory.
Step-by-step explanation:
Preparing a Schedule of Cost of Goods Manufactured
To prepare a schedule of cost of goods manufactured, you need to start by calculating the direct materials, direct labor, and manufacturing overhead incurred during the period. Begin with the direct materials by adding the beginning inventory to the purchases during the period, then subtracting the ending inventory to calculate the direct materials used. Next, add direct labor and manufacturing overhead to determine the total manufacturing costs incurred.
Once you have this figure, add the beginning work in process inventory and subtract the ending work in process inventory to arrive at the cost of goods manufactured. This calculation indicates the total cost of goods actually completed during the period. It is crucial to understand that the cost of production can vary due to factors such as economies of scale illustrated in production studies.
An economy of scale exists when increasing the scale of production results in a lower average cost. As shown in the figure, a small factory producing 1,000 units has a higher cost per unit than a larger factory producing 5,000 units. This economies of scale effect is an important consideration when determining cost structures, as well as in international trade where even a small economy can take advantage of large scale production efficiencies.