How to Find Cost of Goods Manufactured (COGM)

The Cost of Goods Manufactured (COGM) stands as a fundamental financial metric for businesses operating in the manufacturing sector. This figure represents the total expense incurred to produce goods that were completed and moved into finished goods inventory during a specific accounting period. Understanding COGM provides manufacturers with a clear perspective on the direct and indirect costs associated with their production output. This insight is valuable for evaluating operational efficiency and making informed decisions regarding product pricing and overall profitability.

Understanding Cost of Goods Manufactured

Cost of Goods Manufactured (COGM) quantifies the total cost of items brought to completion within a factory during a specific reporting period. Its primary purpose is to bridge the gap between the raw materials purchased and the finished products ready for sale. This metric directly feeds into the calculation of Cost of Goods Sold (COGS) on a company’s income statement, thereby influencing reported profit.

COGM comprises three main categories of production costs. Direct materials are the raw inputs that become an integral physical part of the finished product, such as the fabric for clothing or the plastic for toys. Their cost is directly traceable to each unit produced. Direct labor includes the wages, salaries, and related benefits paid to employees who are directly involved in the physical creation of the product, like assembly line workers or machine operators. These individuals directly convert raw materials into finished goods through their efforts.

Manufacturing overhead encompasses all other costs associated with the production process that are not direct materials or direct labor. Examples include indirect materials, such as lubricants for machinery or cleaning supplies used in the factory, and indirect labor, like the wages of factory supervisors or maintenance staff. Other overhead costs include factory rent, utilities consumed in the production facility, and depreciation on factory equipment. These costs are necessary to support production but cannot be easily linked to specific units.

Work-in-Process (WIP) inventory plays a significant role in the COGM calculation. WIP refers to goods that have begun the production process but are not yet fully completed at the end of an accounting period. This inventory holds accumulated direct materials, direct labor, and manufacturing overhead costs for partially finished items. Tracking WIP inventory is essential as it represents the value of products actively moving through various stages of the manufacturing flow.

Gathering and Preparing Cost Data

Accurately calculating the Cost of Goods Manufactured requires meticulous collection and preparation of specific financial data points from various sources. For direct materials, businesses need to determine their beginning raw materials inventory, which is the value of unused materials on hand at the start of the period. This figure typically carries over from the previous period’s ending inventory balance. The total cost of raw material purchases made during the current period must also be collected, including any associated shipping costs, and adjusted for any returns or discounts received. Finally, the ending raw materials inventory, representing the value of materials remaining at the period’s close, is determined through physical counts or inventory management systems.

Collecting direct labor data involves compiling the total compensation paid to employees directly engaged in production activities. This includes their gross wages, salaries, overtime pay, and performance bonuses. It also encompasses employer-paid benefits directly tied to these production workers, such as contributions to Social Security, Medicare, and unemployment taxes. Health insurance premiums and retirement plan contributions for these employees also form part of direct labor costs.

Manufacturing overhead data requires gathering a broad range of indirect production expenses. This includes the cost of indirect materials, which are supplies used in the factory but not directly incorporated into the final product, such as lubricants or small tools. Indirect labor costs, like the wages and benefits for factory supervisors, security personnel, or maintenance staff who support production indirectly, must also be collected. Utility bills for the manufacturing plant provide the costs for electricity, natural gas, and water consumed in the production process.

Other overhead costs include rent payments if the factory building is leased, or depreciation expense if the building and equipment are owned. Property taxes assessed on the manufacturing facility and insurance premiums paid for coverage on the factory building and equipment are additional components of manufacturing overhead. These costs, while not directly tied to specific units, are necessary for the overall operation of the production facility.

Finally, accurate figures for Work-in-Process (WIP) inventory are essential. The beginning Work-in-Process inventory represents the value of partially completed goods at the start of the period, carrying over from the prior period. The ending Work-in-Process inventory is the value of unfinished goods still in production at the end of the period, requiring careful valuation of the direct materials, direct labor, and manufacturing overhead costs that have been applied to them.

Steps to Calculate Cost of Goods Manufactured

Calculating the Cost of Goods Manufactured involves a sequential process that builds upon the carefully gathered cost data. The first step determines the amount of direct materials actually used in production during the period. This calculation begins with the value of raw materials available at the start of the period. To this, the cost of all raw material purchases made during the period is added, and then the value of raw materials remaining unused at the period’s end is subtracted. For example, if a company had $10,000 in beginning raw materials, purchased $50,000 more, and had $15,000 left at the end, the direct materials used would be $10,000 + $50,000 – $15,000, totaling $45,000.

The second step is to calculate the total manufacturing costs incurred during the current period. This figure represents the sum of the direct materials used, the direct labor costs, and the manufacturing overhead costs for the period. Using the previous example, if direct labor costs were $30,000 and manufacturing overhead was $25,000, the total current manufacturing costs would be $45,000 (direct materials used) + $30,000 (direct labor) + $25,000 (manufacturing overhead), resulting in $100,000. This sum represents all resources put into production during the current reporting cycle.

The final step involves calculating the actual Cost of Goods Manufactured by adjusting the total manufacturing costs for changes in work-in-process inventory. This calculation begins by adding the value of the beginning Work-in-Process inventory to the total manufacturing costs incurred during the period. The beginning Work-in-Process inventory accounts for the value of partially completed goods from the prior period that are now finished. Then, the value of the ending Work-in-Process inventory is subtracted, which removes the costs associated with goods that are still unfinished at the close of the current period.

Continuing with our example, if the beginning Work-in-Process inventory was $20,000 and the ending Work-in-Process inventory was $12,000, the Cost of Goods Manufactured would be calculated as $20,000 (beginning WIP) + $100,000 (total manufacturing costs) – $12,000 (ending WIP). This final calculation yields a Cost of Goods Manufactured of $108,000. This $108,000 figure represents the entire cost of all products that completed their journey through the manufacturing process during the period and are now ready to be transferred to finished goods inventory.