The cost of goods manufactured (COGM) is the total amount of money required to manufacture finished goods in a financial year or accounting period.
COGM can be used to analyze the manufacturing costs incurred by a company. This is useful in analyzing the costs and ways to improve the company’s profit margins. A company can garner higher profit margins even with a lower revenue if it can drastically reduce the cost of manufacturing goods.
Manufacturing companies have accounting variables that are specific to manufacturing settings. These include work-in-progress inventory, raw materials used, labor costs for production, and manufacturing overhead. These can be used to calculate the costs that are specific to the manufacturing of goods.
How to use the cost of goods manufactured formula
The formula for COGM appears straightforward, but each component within the formula needs further calculation using other accounting variables. The basic cost of goods manufactured formula is:
Cost of goods manufactured = total manufacturing cost + beginning work in progress (WIP) inventory - ending WIP inventory
The beginning work in progress (WIP) inventory is the value of goods recorded as WIP at the start of the financial year or accounting period. Ending WIP inventory is the value of goods recorded as WIP at the end of the accounting period considered. Total manufacturing cost has to be separately calculated with a different formula.
Total manufacturing cost
Total manufacturing cost is the total cost of materials, labor, and overheads incurred for manufacturing. The formula for calculating total manufacturing cost is:
Total manufacturing cost = direct materials + direct labor costs + manufacturing overhead
Each of the components that go into total manufacturing cost have to be considered separately.
This is the cost of all the raw materials consumed during the accounting period in consideration. The direct materials formula is:
Direct materials = beginning raw materials + purchases - ending raw materials
This calculates the cost of net raw materials used for production in the given accounting period.
Direct labor costs
It’s easy to calculate direct labor costs for a manufacturing facility. You can find the number of hours worked by each employee in the accounting period in the employee records. Multiply the number of hours worked by the employee’s hourly rate of pay to determine the labor cost for that employee. Take the sum of the labor cost for all employees to find the direct labor cost incurred by the manufacturer in the accounting period.
This variable is the sum of all the indirect costs that are involved in the manufacturing of goods. These include:
Any other costs incurred for the manufacturing process that is not part of direct materials and direct labor will be part of manufacturing overheads.
Calculating COGM variables
The following table illustrates how to calculate the various variables to reach the cost of goods manufactured.
The cost of goods manufactured formula is an accounting formula used to determine what it costs a company to produce its goods in an accounting period. You can then use this figure to analyze other data, such as a company’s profit margin, or to identify cost-cutting opportunities.