The cost of goods manufactured is a calculation of the production costs of the goods that were completed during an accounting period. In other words, it includes the costs of direct materials, direct labor, and manufacturing overhead that are included in the
products that moved from the manufacturing area to the finished goods inventory during the accounting period. The calculation is presented as a schedule or statement. The formula and format for presenting the cost of goods manufactured is: The cost of goods manufactured is similar to a retailer's cost of goods purchased. Hence a manufacturer's cost of goods sold is computed as: The cost of goods manufactured is covered in detail in a cost accounting course. In addition, AccountingCoach PRO includes a form for preparing a schedule of the
Cost of Goods Manufactured.Definition of Cost of Goods Manufactured
Example of the Cost of Goods Manufactured
Definition: The cost of goods manufactured [COGM], also called cost of goods completed, calculates the total value of inventory that was produced during the period and is ready for sale. In other words, this is the total amount of expenses incurred to turn work in process inventory into finished goods. The cost of goods
manufactured equation is calculated by adding the total manufacturing costs; including all direct materials, direct labor, and factory overhead; to the beginning work in process
inventory and subtracting the ending goods in process inventory. This formula will leave you with only the cost of goods that were completed during the period. Another way to look at this calculation is to think of it like the cost of goods completed equals the amount of inventory that was transferred from the goods in process account into the finished goods account by
the end of the period. The cost of goods manufactured total is also a component of the cost of goods sold calculation. Let’s take a look at an example. Steelcase is a furniture manufacturer with a factory and offices in the Midwest. Let’s assume that they had $100,000 of finished goods inventory at the beginning of the period.
Throughout the period, it spent $50,000 on materials for chairs and tables, $125,000 on worker’s salaries, and $65,000 on rent and utilities. After using the equivalent units of production calculation, the Steelcase managers were able to determine that the ending goods in process inventory was $75,000. Thus, the total cost of goods manufactured for the period would be $265,000 [$100,000 + $50,000 + $125,000 + $65,000 – $75,000]. This means that Steelcase was able to finish $265,000
worth of furniture during the period and move this merchandise from the work in process account to the finished goods account by the end of the period. Example
The Cost of Goods Manufactured is the total manufacturing costs of goods that are finished during a certain accounting period.
These costs include direct materials, direct labor, and manufacturing overhead of the products that are transferred from the manufacturing department to the finished goods inventory.
Cost of Goods Manufactured = Direct Materials Cost + Direct Labor Cost + Manufacturing Overhead + Beginning WIP Inventory – Closing WIP Inventory
An Example of How To Compute Cost of Goods Manufactured
Consider a business that manufacturers auto parts.
The costs for manufacturing these parts are:
Direct Materials $250,000
Direct Labor $125,000
Manufacturing Overhead $140,000
Beginning Work in Process Inventory $25,000
Ending Work in Process Inventory $35,000
We can now use these figures to compute the Cost of Goods Manufactured, which we will show in the following T-Account.
The Cost of Goods Manufactured will be shown on the right side, which is the credit side of the T-Account.
Work in Process [WIP] Inventory | |||
| Beginning Balance | $25,000 | ||
| Direct Materials | $250,000 | ||
| Direct Labor | $125,000 | $505,000 | COGM |
| Manufacturing Overhead | $140,000 | ||
| Ending Balance | $35,000 |
COGM = $25,000 + $250,000 + $125,000 + $140,000 – $35,000
COGM = $505,000
Calculating the Direct Materials a Company Uses
For a business to calculate the actual amount of direct materials that were used for production, it is essential to take into account the T-Account for the raw materials inventory.
The raw materials inventory is just the materials in inventory that are being stored until they are ready to be used in the production process.
An example of this would be if a business made a purchase of raw materials it was going to use, these materials would be recorded in the T-Account on the debit side, or left side, of the raw materials account.
Also, should a business requisition a certain number of raw materials that it was going to use in the production process, the business would then subtract this amount from the raw materials inventory and transfer it to work in process inventory.
Direct and indirect materials may be included in the raw materials inventory.
It is also necessary to calculate the number of direct materials used in the production process by using the beginning and ending balances.
Now, we will take a look at the raw materials T-Account shown below.
The formula for calculating the direct materials used is:
Cost of Direct Material Used = Opening Direct Material Inventory + Direct Material Purchased – Closing Direct Material Inventory
Calculating Direct Labor
Calculating the number of hours of direct labor that were used in terms of dollars is generally not difficult for most businesses.
Usually, timesheets and time logs are used, and the business takes the total number of hours the employees worked and multiplies these by the hourly wage rate.
Linking COGM to COGS
After all the necessary figures are computed that need to be used to calculate the Cost of Goods Manufactured for a year, the Cost of Goods Manufactured is calculated and then placed in the Finished Goods Inventory account.
Next, the Cost Of Goods Manufactured is used to compute the Cost of Goods Sold.
The Finished Goods Inventory consists of goods or services that have been totally completed and are ready to be sold to customers.
Below are some T-Accounts that display the Finished Goods Inventory.
It’s important to take into account both the beginning and ending balances, just as is done with raw materials and work in process inventory.
Once everything is ready, the Cost of Goods Manufactured and Cost of Goods Sold Statement can be prepared.
Then, the value for the Cost of Goods Manufactured is transferred to the account for the final inventory named the Finished Goods Inventory account, where it is used to compute the Cost of Goods Sold.
The Finished Goods Inventory consists of any goods or services that are entirely prepared to be shipped to customers.
The beginning and ending balances need to be taken into consideration as well in the same way that the work in process inventory and raw materials are.
The formula for calculating Cost of Goods Sold is:
Starting Inventory + Purchases – Ending Inventory = Cost of Goods Sold
Once all of this is ready, it’s time to put together a complete schedule of Cost of Goods Manufactured and Cost of Goods Sold.
Final Cost of Goods Manufactured [COGM] Schedule
Schedule of Cost of Goods Manufactured For the Year Ended December 31, 2020 | |
| Direct Materials Beginning Raw Materials Inventory Add: Purchases of raw materials Deduct: Ending Raw Materials Inventory Direct Materials used in production | $3,000 $5,000 $2,000 $6,000[$3,000 + $5,000 – $2,000] |
| Direct Labor | $9,000 |
| Manufacturing Overhead | $5,000 |
| Total Manufacturing costs Add: Beginning Work in Process Inventory Deduct: Ending Work in Process Inventory Cost of Goods Manufactured for the Year Add: Beginning Finished Goods Inventory Deduct: Ending Finished Goods Inventory | $20,000 $3,000 $2,000 $21,000 = [[$20,000 +$3,000] – $2,000] $11,000 $10,000 |
| Cost of Goods Sold | $22,000 = [[$21,000 + $11,000] – $10,000] |
What Makes COGM Important?
Most companies are going to want to have a schedule of Cost of Goods Manufactured since it is helpful for management as it allows them to see whether or not the cost of producing goods is reasonable when compared to sales.
An example of this would be a company that has sales of 500,000 and Cost of Goods Sold of 375,000.
A company with these costs should consider finding a way to decrease its manufacturing costs in an effort to improve its gross percentage.
In contrast, a business that earned 400,000 but had a Cost of Goods Sold of $200,000 would have higher profits because although their sales were not as high, their gross margin percentage was higher.
It’s important for a company to have an understanding of all of its manufacturing costs, including labor, materials, and overhead because this will allow the business to look into any problem areas and make any changes necessary to improve the business’s net income.
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