Which of the following are used in the calculation of 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.

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.

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The cost of goods manufactured (COGM) is the total amount of money required to manufacture finished goods in a financial year or accounting period.

COGM can be used to analyze the manufacturing costs incurred by a company. This is useful in analyzing the costs and ways to improve the company’s profit margins. A company can garner higher profit margins even with a lower revenue if it can drastically reduce the cost of manufacturing goods.

Manufacturing companies have accounting variables that are specific to manufacturing settings. These include work-in-progress inventory, raw materials used, labor costs for production, and manufacturing overhead. These can be used to calculate the costs that are specific to the manufacturing of goods. 

How to use the cost of goods manufactured formula

The formula for COGM appears straightforward, but each component within the formula needs further calculation using other accounting variables. The basic cost of goods manufactured formula is: 

Cost of goods manufactured = total manufacturing cost + beginning work in progress (WIP) inventory - ending WIP inventory

The beginning work in progress (WIP) inventory is the value of goods recorded as WIP at the start of the financial year or accounting period. Ending WIP inventory is the value of goods recorded as WIP at the end of the accounting period considered. Total manufacturing cost has to be separately calculated with a different formula.

Total manufacturing cost

Total manufacturing cost is the total cost of materials, labor, and overheads incurred for manufacturing. The formula for calculating total manufacturing cost is:

Total manufacturing cost = direct materials + direct labor costs + manufacturing overhead

Each of the components that go into total manufacturing cost have to be considered separately.

Direct materials

This is the cost of all the raw materials consumed during the accounting period in consideration. The direct materials formula is:

Direct materials = beginning raw materials + purchases - ending raw materials

This calculates the cost of net raw materials used for production in the given accounting period.

Direct labor costs

It’s easy to calculate direct labor costs for a manufacturing facility. You can find the number of hours worked by each employee in the accounting period in the employee records. Multiply the number of hours worked by the employee’s hourly rate of pay to determine the labor cost for that employee. Take the sum of the labor cost for all employees to find the direct labor cost incurred by the manufacturer in the accounting period.

Manufacturing overhead

This variable is the sum of all the indirect costs that are involved in the manufacturing of goods. These include:

• Rent of the building
• Depreciation of equipment used in manufacturing
• The labor cost of supervisory staff
• Property taxes incurred
• Salary of maintenance staff
• Utility charges incurred
• Other indirect costs

Any other costs incurred for the manufacturing process that is not part of direct materials and direct labor will be part of manufacturing overheads.

Calculating COGM variables

The following table illustrates how to calculate the various variables to reach the cost of goods manufactured.

The cost of goods manufactured formula is an accounting formula used to determine what it costs a company to produce its goods in an accounting period. You can then use this figure to analyze other data, such as a company’s profit margin, or to identify cost-cutting opportunities.

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Which of the following is the calculation of cost of goods manufactured?

What is the formula for calculating manufacturing cost?