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Date Posted: 05:22:10 08/28/01 Tue
Author: Pete DaDalt
Subject: CGS and Manufactureres

A student in one of my classes posed a question about calculating CGS for manufacturing: specifically, how does depreciation get figured into the "Beginning Inventory + Purchases - Ending Inventory" calculation?

Here's the answer: The "beg inventory + purchases - ending inventory" CGS calculation refers (as noted in class) to retailers. For manufacturers, you would start with this calculation and also add to CGS:

1) direct labor costs (those attributabele to employees directly involved in the production process). Note that indirect labor costs (like the home office staff salaries) would NOT be included in CGS - only the portion associated with the manufacturing process)

2) Depreciation attributable to the manufacturing process(i.e. the production lines, the building that houses them, etc...). Note that non-manufacturing depreciation such as depreciation on the corporate headquarters' building would not be included in CGS.

3) Any other costs directly associated with production (i.e. the electric bill on the factory)

So, for a manufacturer, you could have some items such as salaries, depreciation, and other expense partly showing up in CGS and partly in operating expense. Which goes where is part of the job that cost accountants do.

Hope this clears things up.

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