Transferred-In Cost Details

The term "transferred-in cost" comes from the fact that firms typically calculate the cost of transferring a partially completed product from one business department to another. Putting it in another way, a transferred-in cost is a cumulative cost of making a product up to the point where it gets transferred to the next manufacturing step. Transferred-in costs incorporate all costs directly related to making a product.

Industries that have several processing phases, such as oil refineries and food processing companies, are the ones that typically use transferred-in cost. These companies usually adopt the cost accounting principle, which is an accounting practice useful to capture total costs by combining the variable expenses of each stage of production.

Traditional financial accounting has the primary purpose of providing external information to third parties. Meanwhile, cost accounting is utilized internally so that businesses can have a complete understanding of all costs associated with the entire manufacturing process. Analyzing the numbers could aid them in making better business judgments.

Transferred-In Cost Example

ABC Corporation is a food-processing company that transforms raw food materials into finished goods through a series of processing stages. To make things simple, let's say that there are a total of two divisions responsible for this. Division A is in charge of processing raw beef into patties, whereas Division B is in charge of finishing them up until they are packed and ready to ship. Division A's production expenses would be "transferred-in costs" for Division B, continuing the manufacturing process.

To record this transaction, bookkeepers use an In-Process Inventory account, a Work In Process account, or something similar. Once Division B has finished its job, and the product is ready to be sold, the account for the transferred-in cost will be moved from In-Process Inventory to Finished Product Inventory.

Transferred-In Cost vs. Cost of Goods Sold

Cost of goods sold (COGS) is the total direct expenses of producing or manufacturing sold goods. The figure of COGS covers the cost of the materials and labor that went into making the product. Indirect expenses such as sales and distribution expenditures are not brought into the equation. You can think of COGS as the total direct costs of bringing goods to the customer from their raw condition to the finished state.

As you may know, transferred-in costs are the accumulated expenses at any point in the manufacturing process. However, what if the product has already passed the end of its production cycle? Can we argue that transferred-in cost for finished products equals costs of goods sold? Well, not quite.

You see, cost of goods sold only takes into account sold or delivered products, in other words, products that have made their way to customers. On the other hand, transferred-in cost accounts for all products, regardless of whether they have been sold or are still in the warehouse. At some point, some or all parts of a product will enter the shipping stage. To account for this transaction, the bookkeeper must enter the appropriate journal entry involving the Finished Product Inventory account and Cost of Goods Sold account.