The beginning direct materials inventory cost was $134,000. During the period, they purchased $189,000 of direct materials and also incurred $3,000 in transportation in costs. However, they also returned $1,000 of direct materials during the period. Adding these together we can calculate the total direct materials available during January as $325,000. Since there was an ending inventory of $124,000, they must have used $201,000 of direct materials during the period. Added to the direct labor, the total prime costs were $501,000. We do not worry about the raw materials and finished goods inventory numbers because the amounts in those accounts were not related to the current period.

Overhead is applied as 60% of direct labor, which totals $180,000 ($300,000 × 60%). Adding the prime costs and the overhead together, we get $681,000 as total manufacturing costs.

B. This is only direct materials plus direct labor and does not include overhead.

C. This is the cost of goods sold.

D. This is the cost of goods manufactured.