What is Cost of Goods Manufactured?
Prior to discussing how to calculate the cost of goods manufactured(COGM) also known as cost of goods completed, we must first know and understand what it is and what it entails.
Unlike retailers, manufacturers have unique inventory categories such as raw materials, work in process, and finished goods, all of which contribute to the calculation of the cost of goods manufactured.
That being said, we can define Cost of goods manufactured (COGM), as a schedule or statement that shows the total production costs for a company during a specific period of time.
The COGM amount is transferred to the finished goods inventory account during the period and is used in calculating cost of goods sold on the income statement.
Importance of COGM.
- The cost of goods manufactured is important because it gives management a general idea of overall production costs and whether these costs are too high or too low.
- Basically, COGM is a very important metric to understanding the health and status of your business.
- It enables a company to plan and adjust its inventory pricing strategy.
- Also it provides a realistic comparison of manufacturing costs from year to year.
- COGM improves a company’s ability to plan for its inventory volume and resource use.
- It is important during the reconciliation of financial records with cost records.
- Moreover, COGM helps to appropriately classify each cost for easier expense recording.
Formula to Calculate COGM.
To calculate the cost of goods manufactured;
- Direct Materials Used
- Direct Labor Used
- Manufacturing Overhead
- Beginning Work in Process (WIP) Inventory
- Ending Work in Process (WIP) Inventory
A company that manufactures furniture incurs the following costs:
Direct Materials: $90,000
Direct Labor: $40,000
Manufacturing Overhead: $50,000
Beginning WIP Inventory: $9,000
Ending WIP Inventory: $20,000
Beginning WIP Inventory
Ending WIP Inventory
Therefore, the COGM of the company is $ 169,000.