Cost of Goods Manufactured (COGM)

What is Cost of Goods Manufactured (COGM)?

Cost of Goods Manufactured, also known to as COGM, is a term used in managerial accounting that refers to a schedule or statement that shows the total production costs for the company during a specific period of time.

Just like the name implies, COGM is the total costs incurred to manufacture products and transfer them into finished goods inventory for actual retail.

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cost of goods manufactured

 

The formula to calculate the COGM is:

Add: Direct Materials Used

Add: Direct Labor Used

Add: Manufacturing Overhead

Add: Beginning Work in Process (WIP) Inventory

Deduct: Ending Work in Process (WIP) Inventory

= COGM

 

Example calculation of Cost of Goods Manufactured (COGM)

This can be more clearly seen in a T-account. For example, let’s say that a company that manufactures furniture incurs the following costs:

Direct Materials: $100,000

Direct Labor: $50,000

Manufacturing Overhead: $60,000

Beginning WIP Inventory: $10,000

Ending WIP Inventory: $30,000

 

Work in Process (WIP) Inventory
Beginning Balance                                     10,000

Direct Materials                                         100,000

Direct Labor                                                50,000

Manufacturing Overhead                         60,000

        190,000*                      COGM
Ending Balance                                           30,000

 

With this information, we can solve for COGM, which is on the credit side of the WIP Inventory T-Account.

 

COGM = 10,000 + 100,000 + 50,000 + 60,000 – 30,000 = $190,000*

 

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Determining Direct Materials Used

In order to determine the actual direct materials used by the company for production, we must consider the Raw Materials Inventory T-account. Raw materials inventory refers to the inventory of materials that are waiting to be used in production. For example, if a company were to make a material purchase for use, these would be stored in the debit side of the raw materials inventory T-Account. In addition, if a specific number of raw materials were requisitioned to be used in production, this would be subtracted from raw materials inventory and transferred to WIP Inventory. Raw materials inventory can include both direct and indirect materials. Beginning and ending balances must also be used to determine the direct materials used. Let’s also examine the following T-account.

 

Raw Materials Inventory
Beginning Balance                                      a

Purchases of Raw Materials                      b

      d    Raw materials used in production
Ending Balance                                            c

 

The raw materials used in production (d) is then transferred to the WIP Inventory account to calculate COGM.

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Determining Direct Labor and Manufacturing Overhead

Determining how much direct labor was used in dollars is usually straightforward for many companies. With time logs and time sheets, companies just take the number of hours worked multiplied by the hourly rate. For information on calculating for manufacturing overhead, refer to the Job-order Costing link.

 

Linking COGM to COGS

Finally, once all the individual parts are calculated and used to figure out the total cost of goods manufactured for the year, this COGM value is then transferred to a final inventory account called the Finished Goods Inventory account to calculate Cost of Goods Sold. Finished Goods inventory, like the name suggests, will contain any products, goods, or services, that are fully ready to be delivered to customers in its final form. The following t-account shows the application. Beginning and ending balances must also be considered, similar to Raw materials and WIP Inventory.

 

Finished Goods Inventory
Beginning Balance                                       a

Cost of Goods Manufactured                    b

               d                   Cost of Goods Sold
Ending Balance                                            c

 

With all the pieces together, we can put everything together to construct a fully Schedule of Cost of Goods Manufactured.

 

Final Cost of Goods Manufactured (COGM) formula

 

Schedule of Cost of Goods Manufactured

For the Year Ended December 31, 2017

Direct Materials

Beginning Raw Materials Inventory

Add: Purchases of raw materials

Deduct: Ending Raw Materials Inventory

Direct Materials used in production

 

a

b

c

d = a + b – c

Direct Labore
Manufacturing Overheadf
Total Manufacturing costs

Add: Beginning WIP Inventory

Deduct: Ending WIP Inventory

Cost of Goods Manufactured for the Year

Add: Beginning Finished Goods Inventory

Deduct: Ending Finished Goods Inventory

g = d + e + f

h

i

j = g + h – i

k

l

Cost of Goods Soldm = j + k – l

 

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Why is COGM important for companies?

In general, having the schedule for Cost of Goods Manufactured is important because it gives companies and management a general idea of whether production costs are too high or too low relative to the sales they are making.

For example, if a company earned $1,000,000 in sales revenue for the year and incurred $750,000 in Cost of Goods Sold, they might want to look at ways to reduce their manufacturing costs to increase their gross margin percentage.

Comparatively, if another company earned $800,000 in sales revenue and incurred only $400,000 in COGS, even though the company’s sales were lower, their gross margin percentage is much higher, which makes the latter company generally more profitable.

Therefore, by having a general picture of what the company is incurring in terms of manufacturing costs in all its specific components of materials, labor, and overhead, management can examine these areas more thoroughly to make any necessary changes to maximize the company’s net income.

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Learn more

We hope this has been a helpful guide on how to calculate Cost of Goods Manufactured (COGM).  To keep learning and expanding your knowledge base, the resources below may be helpful in advancing your career: