How to Calculate Cost of Goods Manufactured

The Cost of Goods Manufactured (COGM) is a financial metric representing the total cost of products completed and moved out of the production process during a specific accounting period. Understanding COGM allows companies to accurately determine the cost of their finished goods, which is vital for setting appropriate selling prices and assessing overall profitability. This metric provides insights into manufacturing expenses and supports informed decisions regarding cost control and operational improvements.

Understanding Manufacturing Cost Components

Calculating the Cost of Goods Manufactured involves summing all individual inputs that contribute to total manufacturing costs. These costs are broadly categorized into direct materials, direct labor, and manufacturing overhead.

Direct materials are raw materials that become an integral part of the finished product and can be directly traced. To calculate the cost of direct materials used in production, businesses consider their beginning raw materials inventory, add new purchases made during the period, and then subtract the ending raw materials inventory. For example, in furniture manufacturing, wood, fabric, and fasteners are direct materials.

Direct labor refers to the wages, salaries, and related benefits paid to employees who are directly involved in the manufacturing process. This includes the compensation for workers operating machinery, assembling components, or performing tasks that transform raw materials into finished goods. Tracking direct labor involves recording the hours worked by production employees and applying their hourly rates.

Manufacturing overhead encompasses all indirect costs associated with the production process that are not direct materials or direct labor. These costs are necessary for production but cannot be directly traced to specific units. Examples include indirect materials (like lubricants), indirect labor (such as factory supervisors), factory utilities, rent for the factory building, equipment depreciation, and insurance.

Accounting for Work-in-Process Inventory

Work-in-Process (WIP) inventory represents goods that have begun manufacturing but are not yet complete at the end of an accounting period. These items have direct materials, direct labor, and manufacturing overhead costs invested, but are not yet ready for sale. WIP inventory is considered a current asset on a company’s balance sheet.

The concept of beginning Work-in-Process inventory refers to the value of partially completed goods that were on hand at the start of the current accounting period. This balance typically carries over from the ending WIP inventory of the previous period. Conversely, ending Work-in-Process inventory represents the value of unfinished goods remaining in production at the close of the current period. These inventory figures are crucial because they represent the flow of costs into and out of the production pipeline.

Valuing Work-in-Process inventory involves accumulating the costs of direct materials, direct labor, and applied manufacturing overhead that have been invested in these incomplete goods. This valuation reflects the stage of completion for items still in production. The distinction between beginning and ending WIP balances allows for an accurate accounting of costs that have entered and exited the production line during the period, which is a necessary step before calculating the final Cost of Goods Manufactured.

Calculating the Cost of Goods Manufactured

The Cost of Goods Manufactured (COGM) calculation brings together all the previously determined cost components and inventory figures. This procedural step shows the total cost of products that were completed and transferred from the production area to finished goods inventory during a specific period. The formula for COGM is: Beginning Work-in-Process Inventory + Total Manufacturing Costs (Direct Materials Used + Direct Labor + Manufacturing Overhead) – Ending Work-in-Process Inventory.

To illustrate, consider a scenario where a company has a beginning Work-in-Process inventory of $15,000. During the accounting period, the cost of direct materials used amounted to $70,000, direct labor costs were $45,000, and manufacturing overhead totaled $60,000. Summing these three gives total manufacturing costs of $175,000. At the end of the period, the ending Work-in-Process inventory is determined to be $20,000.

Plugging these figures into the COGM formula, we add the beginning Work-in-Process inventory ($15,000) to the total manufacturing costs ($175,000), which results in $190,000. From this sum, the ending Work-in-Process inventory ($20,000) is subtracted. The resulting Cost of Goods Manufactured for the period is $170,000. This $170,000 represents the full cost of all products that finished their production cycle and are now ready for sale.