How to Compute Cost of Goods Manufactured

The Cost of Goods Manufactured (COGM) represents the total cost associated with products a company finishes producing and transfers from its work-in-process inventory to its finished goods inventory during a specific accounting period. It provides insight into the efficiency of production processes and directly influences profitability. COGM focuses solely on the expenses incurred to complete products, regardless of whether they have been sold yet, distinguishing it from the cost of goods sold.

Components of Manufacturing Cost

Manufacturing a product involves three primary cost categories: direct materials, direct labor, and manufacturing overhead. Accurately identifying and tracking these costs is necessary for computing the total cost of goods manufactured.

Direct Materials

Direct materials are raw materials and components that become an integral part of the finished product and can be directly traced to specific units. For instance, in furniture manufacturing, the wood, fabric, and hardware used for a chair are direct materials. Companies track purchase prices, including freight or duties, to determine the cost of direct materials used.

Direct Labor

Direct labor refers to wages, salaries, and benefits paid to employees who physically and directly work on converting raw materials into finished goods. An example includes the wages of assembly line workers or a welder fabricating bicycle frames. Companies track direct labor costs using time sheets or digital systems, multiplying hours by hourly rates and including associated payroll taxes and benefits.

Manufacturing Overhead

Manufacturing overhead includes all other costs associated with the production process that cannot be directly traced to specific products. This category encompasses a wide range of indirect expenses necessary for factory operations. Examples include indirect materials, such as lubricants or cleaning supplies, and indirect labor, like the wages of factory supervisors or maintenance staff. Other common costs are factory utilities, factory rent, depreciation on factory equipment and buildings, and property taxes on the manufacturing facility.

Understanding Work-in-Process Inventory

Work-in-Process (WIP) inventory consists of partially completed goods still undergoing transformation but not yet finished products ready for sale. These items represent an intermediate stage in the production pipeline, holding value from the direct materials, direct labor, and manufacturing overhead costs already invested.

Beginning Work-in-Process Inventory

Beginning Work-in-Process Inventory refers to the value of partially completed goods in production at the start of an accounting period. This value carries over from the ending WIP inventory balance of the previous period. It represents the accumulated costs for products not finished by the end of the prior period.

Ending Work-in-Process Inventory

Ending Work-in-Process Inventory is the value of partially completed goods remaining in production at the end of the current accounting period. These products have received some manufacturing inputs but are not yet ready for transfer to finished goods inventory. Both beginning and ending WIP inventory figures account for production value spanning different accounting periods, adjusting total manufacturing costs to isolate costs of only completed goods.

Computing Cost of Goods Manufactured

The calculation of the Cost of Goods Manufactured (COGM) combines manufacturing costs incurred during a period with changes in work-in-process inventory. This yields the total cost of products completed and ready for sale or transfer to finished goods inventory.

The formula to determine COGM begins with the value of beginning work-in-process inventory. To this, the total manufacturing costs incurred during the period are added. These total manufacturing costs encompass direct materials used, direct labor expended, and manufacturing overhead applied. Finally, the value of the ending work-in-process inventory is subtracted. The resulting figure represents the Cost of Goods Manufactured.

For example, consider a company with a beginning work-in-process inventory of $15,000. During the period, it incurred $50,000 in direct materials used, $30,000 in direct labor costs, and $25,000 in manufacturing overhead. This means its total manufacturing costs for the period are $105,000 ($50,000 + $30,000 + $25,000). If the ending work-in-process inventory is $20,000, the Cost of Goods Manufactured would be calculated as follows: $15,000 (Beginning WIP) + $105,000 (Total Manufacturing Costs) – $20,000 (Ending WIP) = $100,000. This $100,000 represents the cost of all goods completed and transferred out of work-in-process inventory during that period.