How to Calculate Cost of Goods Manufactured (COGM)

The Cost of Goods Manufactured (COGM) is a key metric in manufacturing accounting, representing the total cost of products completed and moved from work-in-process to finished goods inventory during a specific period. It includes all expenses directly tied to the production process. This calculation is distinct from the cost of goods sold (COGS), as COGM focuses solely on goods that reached completion, regardless of whether they were sold. Understanding COGM allows businesses to assess production costs, manage inventory, and make informed decisions regarding pricing and operational improvements.

Identifying the Cost Components

Calculating the Cost of Goods Manufactured begins with understanding its three core cost components: direct materials, direct labor, and manufacturing overhead. These elements represent the expenses incurred in transforming raw inputs into finished products. Accurately categorizing these costs is an important step in deriving COGM.

Direct materials are raw materials and components that become part of the finished product and can be directly traced to it. For instance, the wood used by a furniture manufacturer or the fabric for clothing are considered direct materials. Their cost can be easily identified and quantified per unit.

Direct labor refers to the wages paid to employees directly involved in converting raw materials into finished products. This includes compensation for workers who assemble, operate machinery, or perform other hands-on tasks that shape the product. Examples include assembly line workers, machine operators, or bakers. Direct labor costs often encompass associated expenses like payroll taxes, employee benefits, and workers’ compensation insurance.

Manufacturing overhead includes all indirect costs associated with the manufacturing process that cannot be directly traced to specific products. These costs support the manufacturing environment but do not become a physical part of the product or involve direct hands-on labor. Common examples include indirect materials, such as lubricants for machinery or cleaning supplies. Indirect labor, like the salaries of factory supervisors, quality control staff, or maintenance personnel, also falls under manufacturing overhead. Factory-related expenses such as rent, utilities, depreciation on manufacturing equipment, and factory insurance are also part of manufacturing overhead.

Determining the Cost of Direct Materials Used

After identifying direct materials, the next step in calculating COGM involves determining the cost of direct materials consumed during the production period. This figure represents the value of raw materials actually put into production, not merely purchased. An accurate calculation of direct materials used is important because it directly impacts the total manufacturing costs.

The formula to calculate direct materials used is: Beginning Raw Materials Inventory + Raw Material Purchases – Ending Raw Materials Inventory. This calculation starts with the value of raw materials available at the beginning of the period, adding new purchases.

Subtracting the value of raw materials remaining at the end of the period yields the cost of materials consumed in the production process. For example, if a company started with $10,000 in raw materials, purchased $5,000 more, and ended with $3,000, the direct materials used would be $12,000. This method ensures that only materials transformed into products are accounted for in the current period’s production costs.

Calculating Total Manufacturing Costs Incurred

With the cost of direct materials used determined, the next step involves aggregating all costs directly attributable to production during the period to arrive at the total manufacturing costs incurred. This important subtotal combines the three primary cost components: direct materials used, direct labor, and manufacturing overhead. This figure represents the expenses spent on production activities within the specified timeframe.

The formula for total manufacturing costs incurred is: Direct Materials Used + Direct Labor + Manufacturing Overhead. This summation brings together the value of raw materials, direct labor costs, and all indirect factory expenses. This calculation provides a measure of the resources expended to create goods during the period.

For instance, if a company used $12,000 in direct materials, incurred $8,000 in direct labor costs, and had $5,000 in manufacturing overhead, the total manufacturing costs incurred would be $25,000. This amount signifies the entire cost input into the manufacturing process before considering the stage of completion of the goods. This figure is an important intermediate step toward determining the final Cost of Goods Manufactured.

Incorporating Work-in-Process Inventory

Once the total manufacturing costs incurred are calculated, work-in-process (WIP) inventory must be incorporated to determine the Cost of Goods Manufactured. WIP inventory represents partially completed goods still undergoing production and not yet finished. These products have consumed direct materials, direct labor, and manufacturing overhead but are not yet ready for sale.

The formula to integrate WIP inventory into the calculation is: Beginning Work-in-Process Inventory + Total Manufacturing Costs Incurred – Ending Work-in-Process Inventory = Cost of Goods Manufactured. Beginning WIP inventory is added because these are costs from the previous period completed in the current period. This ensures that costs associated with goods started earlier but finished now are included in the current period’s COGM.

Conversely, ending WIP inventory is subtracted because these are costs incurred in the current period for products still incomplete and to be finished in a future period. Excluding these costs from the current COGM ensures that the calculation only reflects expenses for goods fully completed during the reporting period. This adjustment provides a measure of the cost of goods ready for transfer to finished goods inventory.

Assembling the COGM Statement

The final step in determining the Cost of Goods Manufactured involves assembling all previously calculated components into a statement. This consolidated calculation provides the final figure for the cost of products completed and transferred to finished goods inventory during the period. It integrates the consumption of materials, the application of labor, and the allocation of overhead, adjusted for inventory in various stages of completion.

The COGM formula is: Beginning Work-in-Process Inventory + Direct Materials Used + Direct Labor + Manufacturing Overhead – Ending Work-in-Process Inventory = Cost of Goods Manufactured. This statement summarizes all costs incurred in bringing goods to completion within a specific accounting period. It is an important internal report for manufacturing companies, offering insights into production efficiency and cost control. While COGM itself does not directly appear on a company’s income statement, its calculated value is transferred to the finished goods inventory account and subsequently used in determining the Cost of Goods Sold for financial reporting purposes.