Mastering COGM Calculation: Your Essential Guide

When it comes to business, understanding your costs is key. One crucial aspect of this is the Cost of Goods Manufactured (COGM). In this guide, we’ll take you through the ins and outs of COGM, from its definition to the formula and its importance. Let’s dive in!

What is Cost of Goods Manufactured (COGM)?

Cost of Goods Manufactured (COGM) is a term often used in managerial accounting. It’s essentially a statement or schedule that reveals the total production costs. These costs encompass everything involved in production over a specific period. This includes direct labor expenses, direct materials costs, and even production overhead costs.

Why is COGM Important?

In today’s business landscape, keeping a close eye on total costs is imperative. It’s the only way to ensure that your production costs align with your sales. To illustrate, consider a company with $100,000 in sales and $50,000 in goods sold. With this information, they can make informed decisions about reducing labor, direct materials, and total manufacturing costs. COGM provides detailed metrics, making it an indispensable tool for businesses.

The COGM Formula

Let’s break down the formula for calculating the Cost of Goods Manufactured:

COGM = Direct Material Costs + Direct Labor + Manufacturing Overhead + Beginning Work in Progress (WIP) Inventory – Ending Work In Progress (WIP) Inventory

How to Calculate COGM

Now, let’s walk through the process of using the formula to calculate COGM:

1. Direct Materials Costs

Direct materials costs pertain to the pricing of raw materials. To calculate this, you’ll need to consider:

Direct Material Costs = Starting Raw Materials Inventory + Raw Materials Costs Purchased – Ending Raw Materials Inventory

2. Direct Labor Costs

Labor costs encompass the work performed by the labor force. To calculate these costs, you’ll need to determine the total number of hours and multiply them by the hourly wage rate.

Direct Labor Costs = Total Number of Hours × Hourly Wage Rate

3. Manufacturing Overhead

Manufacturing overhead includes expenses unrelated to production, such as glue, sandpaper, insurance, and taxes.

Manufacturing Overhead = Indirect Materials Costs + Indirect Labor Expenses + Taxes + Insurance

4. Total Manufacturing Costs

All the costs mentioned above add up to the total manufacturing cost:

Total Manufacturing Costs = Direct Labor + Direct Materials Costs + Manufacturing Overhead

5. Starting and Ending WIP Inventory

You must also consider the beginning and ending Work In Progress (WIP) inventory. WIP inventory represents the cost of materials not used in production during the accounting period. After gathering these values, plug them into the COGM formula and move the results to the ending finished goods inventory account.

COGM = Total Manufacturing + Beginning WIP – Ending WIP

Example

Let’s put the formula to the test with an example. Imagine a furniture company with the following costs:

• Labor cost: $135,000
• Factory overhead costs: $150,000
• Direct Material cost: $150,000
• Beginning WIP Inventory: $35,000
• Ending WIP Inventory: $45,000

Now, let’s calculate the COGM:

COGM = $135,000 + $150,000 + $35,000 + $150,000 – $45,000 = $425,000

Benefits of COGM

Understanding COGM comes with numerous advantages. It provides a detailed insight into your business, including manufacturing costs, raw materials used, financial statements, income statements, completed goods, and expenditures. This knowledge allows for better expense management and budget allocation. Some additional benefits of COGM include:

• Enabling a business to plan out its pricing strategy
• Offering actual costs related to manufacturing
• Providing a detailed insight into inventory storage and production
• Facilitating cost expense recording
• Keeping track of hourly wage rates and total manufacturing costs

COGM vs. COGS

While COGM and COGS may sound similar, they are distinct concepts. Cost of Goods Sold (COGS) encompasses the expenses associated with completed and sold products. It includes raw materials, shipping, storage, and labor rates. When subtracted from a company’s revenue, COGS provides the gross profit margin. It’s essential not to confuse these two terms.

FAQs about COGM

1. What is Cost of Goods Manufactured in Accounting?

Cost of Goods Manufactured in accounting represents the total cost of manufacturing a product, including moving completed goods to finished goods inventory within a specific accounting period.

2. What is Included in Cost of Goods Manufactured?

The cost of goods manufactured includes all expenses required for product creation. This includes direct manufacturing costs, overhead manufacturing costs, labor costs, beginning WIP inventory account costs, and ending WIP inventory costs.

3. What is Work In Process Inventory (WIP)?

Work in Process Inventory (WIP) refers to the cost of products that are still in production. It’s typically used at the end of an accounting period or when a new accounting period begins.

4. What Are the Disadvantages of Cost of Goods Manufacturing?

Some disadvantages of Cost of Goods Manufactured include the need for a company to maintain a set amount of inventory once expenses are fixed. Additionally, incorrect cost calculations can affect profit margins and result in higher costs.

What’s Next

The concept of Cost of Goods Manufactured is essential in the world of production. It encompasses labor and material costs, WIP inventory, and overhead manufacturing expenses. With COGM, businesses can plan their pricing strategies, understand actual manufacturing costs, manage inventory, and allocate budgets effectively. If you’re new to COGM, visit our service page for more information.