How To Calculate The Cost Of Goods Manufactured Formula? – Steps To Follow

Evaluating the cost of goods manufactured (COGM) has its merits. Businesses need to run evaluation processes in different operation phases, and production is crucial.

The cost of goods manufactured formula helps maintain a business’s budget and helps identify production-related problems. It is the best way to maximize the profitability of a business through value assessment.

Businesses, especially product-based ones, must evaluate the cost of manufactured goods. I have discussed the formula for the cost of goods manufactured in this article to help you profit and succeed in business.

I have also discussed the relationship between COGS ( cost of goods sold) and COGM in a separate section.

So, without any more delay, let me start by defining the cost of goods manufactured.

What Is The Cost Of Goods Manufactured?

The “cost of goods manufactured (COGM)” is a term in accountancy. This term shows the cost of the total production of a company within a specific time period. Basically, with the help of COGM, you calculate the cost of converting raw materials into final products.

The term represents the total cost of converting the raw materials of a company into final consumable goods.

While calculating COGM, businesses also consider factors like raw materials, labor costs, and other costs. Apart from that, many accounts experts also consider completed goods and produced goods under COGM.

The term cost of goods manufactured refers, or COGM, to the overall expenditure of a business for production within a specific period. The total cost needed to convert any raw material into salable products is the calculation of COGM. You can also refer to the term for all completed or produced products. It includes the cost of raw materials and labor needed for production.

Hence, to calculate COGM, you need to add the cost of manufacturing with the cost at the beginning of the work in progress. Then, you subtract the sum from the cost of ending work in progress.

Here, the “work in progress” term refers to any partially complete non-marketable inventory. Generally, these products are not yet finished. Hence, these are not ready for sale in the market.

What Is The “Cost of Goods Manufactured” Formula?

Small and big businesses need the COGM formula to examine their profit. This calculation helps businesses understand whether the cost of manufacturing their product is high or low. If the manufacturing cost is high, the company needs to plan accordingly to create a budget to make the most out of the annual revenue.

So, here is the cost of goods manufactured formula:

How To Calculate Cost Of Goods Manufactured?

Here is a simple explanation of the formula:

When trying to evaluate the cost of goods manufactured, businesses need to follow the instructions below –

• At first, you need to understand each of the terms and what they stand for. After that, you can apply it.
• Now, add the direct labor, raw materials, and manufacturing overhead and calculate the total manufacturing cost of your business.
• You need to add the beginning work in progress to the total manufacturing cost.
• Finally, subtract your ending work in progress from your total manufacturing cost to get the COGM.

Factors To Consider While Calculating The Cost Of Goods Manufactured

Before you calculate COGM to find costs in your business, here are some of the major factors you need to consider:

1. Understand The Formula

To get the correct value of COGM, you need to use the right formula. Hence, learn the formula and understand each aspect of it before you apply it. However, this should not be a problem since the formula is simple and straightforward. Also, the calculation coming out of it should not be complex.

2. Choose A Calculation Period

Like every financial calculation, you will also need to select a time period in the manufacturing process. This is where you need to apply the formula. However, this can change as per the type of organization you have.

3. Find Your Beginning Work-in-Progress Inventory

The Beginning Work-in-Progress inventory cost is the value of those products that are still in production. Basically, any business or company can determine this value at the start of a business period or at the end.

The value that will increase with time will also contribute to the value that comes through COGM.

4. Calculate The Total Cost Of Manufacture

This cost includes the cost of direct materials, manufacturing overhead costs, labor, and more. Here, the cost of direct materials includes those raw materials that the company uses in the production of its goods. On the other hand, labor cost is the amount that the company pays to its employees.

5. Find The Ending Work-in-Progress Inventory

The ending Work-in-Progress inventory is the value of goods that you have not yet produced but will produce by the end of the time period. You need to subtract this value from the sum of the beginning WIP cost and the total cost of manufacture.

Cost Of Goods Manufactured Mathematical Example

Here is a mathematical example of calculating the COGM –

COGM Vs COGS: What Is The Relation?

COGS of a company is the direct expenditure of a company in producing a particular product. All the costs of the materials and the labor needed for manufacturing are included in the COGS (cost of goods sold). However, it excludes indirect costs like marketing and sales overhead costs.

The COGM of a company gives the company a comprehensive insight into all the elements of cost. The final amount of a product is placed on the finished goods inventory after calculating each part of the COGM.

The cost of manufactured goods helps businesses gain insight into the overall production cost. On the other hand, COGS allows companies to calculate their gross profit and gross margin by deducting them from the revenues.

What Is The Importance Of COGM?

Although you may already have an idea about the benefits of the cost of goods manufactured, here, I have highlighted some key importance of calculating COGM:

• The manufacturing cost of goods allows businesses to measure if the cost needed is too high or too low.
• Calculating this cost helps them balance the products by either increasing or decreasing the manufacturing cost.
• Calculating the COGM helps businesses calculate their gross margin percentage.
• A business with a lower volume of sales but a well-maintained COGM potentially generates more profit.
• By calculating the labor cost, and raw materials, companies have control over each of the steps of production. Hence,it provides a way to improve net income.

Frequently Asked Questions (FAQs):

I hope that you have found the cost of goods manufactured formula from the previous sections. However, for further queries, you need to look at the questions and answers below.

1. What Is Included In COGS?

COGS means the cost of the goods sold. But what does this cost include? All the costs incurred in creating products that a company offers. This cost directly relates to the production and sales of a product. This cost excludes indirect costs like overhead marketing & sales.

2. How Do You Calculate COGS In Excel?

If you want to calculate the cost of the goods sold, you have to follow the formula below:

Beginning Inventory + Purchases during the year / Ending Inventory = COGS. Also, if you want to calculate it in Excel, you can see the video below.

3. What Does the Cost Of Goods Sold Tell You, And Why Is It Important?

Knowing how to calculate the COGS of your business is a crucial part of your business. When you subtract the COGS from the revenue, you get the gross profit of your business. Since calculating the profit of your business is the most important part, understanding COGC is very important.

4. What Is Included In COGM?

The direct manufacturing cost of any product is called the COGM or the cost of the goods manufactured. This total manufacturing cost includes the direct materials, labor needed, and the manufacturing overhead of goods transferred to the inventory from the manufacturing department.

Final Words

Whether you are a beginner business person or you have been seasoned in the industry for years, it is crucial for you to calculate the COGM. This article already explains the cost of goods manufactured formula in minute detail. I have also given a mathematical example to make it easily understandable.

Did you find your answer in this article? If you did, let us know in the comment section. Also, if you have any further queries, you can comment below.

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