How to Prepare a Schedule of Cost of Goods Manufactured
An essential internal report, the Schedule of Cost of Goods Manufactured translates production activity into a key figure for calculating Cost of Goods Sold.
The Schedule of Cost of Goods Manufactured is an internal report for any business involved in production that tracks the total costs incurred to complete products within an accounting period. This schedule is not typically shared outside the company; its primary function is to provide management with a clear view of production costs, aiding in cost control and planning. By summarizing the flow of costs from raw materials to completed goods, it offers insights into production efficiency and helps in setting prices.
Gathering the Necessary Cost Data
Before constructing the schedule, specific cost data must be collected. This begins with determining the cost of direct materials used in production, which is not simply the total of raw materials purchased. It requires an inventory calculation: the beginning raw materials inventory is added to raw material purchases, and the ending raw materials inventory is subtracted from this sum. The result is the value of materials that entered the production process.
The next component is direct labor, which includes the wages and benefits paid to employees directly involved in converting raw materials into a finished product. These are workers such as machine operators and assembly line workers whose work can be traced to specific units of production. It is important to isolate these costs from indirect labor.
Manufacturing overhead includes all production costs other than direct materials and direct labor. These indirect costs are necessary for factory operations but are not tied to a single product. Examples include indirect materials like lubricants, indirect labor like supervisor salaries, factory rent, property taxes, utilities, and depreciation on factory buildings and equipment.
The values for beginning and ending work-in-process (WIP) inventory are required. WIP inventory consists of goods that are partially completed at the start or end of the accounting period. These units have already incurred some costs for materials, labor, and overhead but are not yet ready for sale. Accurately valuing these inventories is necessary to reflect the costs of goods finished during the period.
Constructing the Schedule of Cost of Goods Manufactured
With the necessary data gathered, the schedule can be assembled. The report begins with the value of the beginning work-in-process inventory. This figure represents the costs tied up in partially completed goods from the previous period that are carried over to the current one.
To this beginning balance, the total manufacturing costs incurred during the period are added. The sum of these figures yields the “total cost of work in process,” which is the total cost invested in all goods that were in production during the period.
From the total cost of work in process, the value of the ending work-in-process inventory is subtracted. This step removes the costs associated with goods that are still incomplete at the end of the period. These costs will be carried over to the next period.
The result of this calculation is the Cost of Goods Manufactured (COGM). This figure represents the total cost of all products completed and transferred to the finished goods inventory during the period. It is a performance indicator for the manufacturing function of the business.
Using the Cost of Goods Manufactured Figure
The Cost of Goods Manufactured (COGM) figure is used to calculate the Cost of Goods Sold (COGS) on a company’s income statement. The income statement is a financial report shared with external stakeholders like investors and creditors. COGS is a major expense that determines a company’s gross profit.
The calculation for Cost of Goods Sold begins with the beginning finished goods inventory, which is the value of completed products ready for sale at the start of the period. The Cost of Goods Manufactured is then added to this amount. This sum provides the “cost of goods available for sale,” representing the total value of all products that could have been sold.
From the cost of goods available for sale, the ending finished goods inventory is subtracted. This removes the cost of products that were completed but remained unsold at the end of the period. The resulting figure is the Cost of Goods Sold, which is reported on the income statement. This flow clarifies the distinction between COGM—the cost to produce goods—and COGS, the cost of the goods that were actually sold.