What Is the Cost of Goods Manufactured?

The Cost of Goods Manufactured (CGM) represents the total cost of products completed and moved into finished goods inventory during a specific period. This metric provides a clear picture of expenses incurred to transform raw materials into sellable items. For manufacturing businesses, understanding CGM is important for evaluating production efficiency and assessing overall profitability, serving as an internal benchmark for production activities.

Understanding Manufacturing Costs

Manufacturing a product involves three primary categories of costs: direct materials, direct labor, and manufacturing overhead. These elements combine to form the total manufacturing costs, which are then used in the CGM calculation.

Direct materials are raw goods that become an integral physical part of the finished product and can be directly traced to specific units. For instance, steel for a car frame or wood for furniture are direct materials.

Direct labor refers to wages paid to employees who physically work on the product, with their efforts directly traceable to individual units. Examples include assembly line workers or machine operators directly involved in shaping components.

Manufacturing overhead encompasses all indirect costs associated with the manufacturing process that cannot be directly traced to specific products. These are necessary expenses for production but do not directly become part of the product. Common examples include factory rent, utilities for the production facility, depreciation on manufacturing equipment, and indirect labor such as factory supervisors or maintenance staff.

Calculating the Cost of Goods Manufactured

The calculation of the Cost of Goods Manufactured involves accounting for partially completed goods at various stages of production. These partially completed items are known as Work-in-Process (WIP) inventory. Beginning WIP inventory represents the value of goods that were still in production at the start of an accounting period, while ending WIP inventory refers to the value of goods that remain unfinished at the period’s close.

The formula to calculate the Cost of Goods Manufactured is: Beginning Work-in-Process Inventory + Total Manufacturing Costs – Ending Work-in-Process Inventory = Cost of Goods Manufactured. Total manufacturing costs are the sum of direct materials, direct labor, and manufacturing overhead incurred during the period. This formula adjusts the total costs of production for the changes in inventory that are still in the production pipeline.

To illustrate, consider a company with a beginning Work-in-Process inventory of $15,000. During the period, it incurred $50,000 in direct materials, $30,000 in direct labor, and $20,000 in manufacturing overhead. This results in total manufacturing costs of $100,000. If the ending Work-in-Process inventory is $10,000, the Cost of Goods Manufactured would be calculated as: $15,000 (Beginning WIP) + $100,000 (Total Manufacturing Costs) – $10,000 (Ending WIP) = $105,000. This $105,000 represents the cost of products completed and ready for sale during that period.

Placement in Financial Statements

The Cost of Goods Manufactured figure plays a role in a company’s financial reporting, particularly in the income statement. While CGM itself is not directly reported on the income statement, it is an input for calculating the Cost of Goods Sold (COGS). CGM represents the cost of goods that have been completed and moved into finished goods inventory, whereas COGS represents the cost of goods that have been sold to customers.

To determine the Cost of Goods Sold, the formula used is: Beginning Finished Goods Inventory + Cost of Goods Manufactured – Ending Finished Goods Inventory = Cost of Goods Sold. This calculation directly links the production costs of completed goods to the expenses recognized when those goods are sold. The resulting COGS figure is then subtracted from sales revenue on the income statement to arrive at the gross profit.

The flow of costs in a manufacturing business begins with raw materials, which are then converted into work-in-process. The Cost of Goods Manufactured represents the costs that transition from work-in-process to finished goods. Finally, when finished goods are sold, their cost moves into Cost of Goods Sold. This progression provides insights for internal management decisions, such as setting product prices, planning production schedules, and evaluating the efficiency of manufacturing operations.