Cost of Goods Manufactured (COGM)

What is the Cost Of Goods Manufactured (COGM)?

Cost of Goods Manufactured (COGM) refers to the total cost incurred by a company to produce goods, including direct materials, labor, and manufacturing overhead expenses.

COGM can evaluate performance across different periods or benchmark against competitors, providing valuable insights that help management make strategic decisions and improve manufacturing efficiency.

For example, COGM for shoes includes everything from the raw materials used in the shoes to the workers’ salaries and the rent of the facility where the shoes are made.

The cost of goods sold (COGS) appears on the income statement and is calculated using the cost of goods manufactured (COGM), adjusted for changes in inventory.

COGM excludes costs unrelated to production, such as utilities for non-manufacturing facilities or marketing expenses. It only accounts for costs directly tied to the manufacturing process.

Additionally, it does not include the cost of unfinished goods at the end of the period. Those are categorized as work-in-progress (WIP) inventory.

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The Cost of Goods Manufactured (COGM) represents the total cost incurred by a company to produce goods, including direct materials, labor, and manufacturing overhead expenses.
Tracking COGM helps businesses identify cost trends, manage inventory, pinpoint inefficiencies, and discover opportunities to optimize their manufacturing processes. It also supports accurate financial reporting.
A lower COGM typically indicates better cost control, while a higher COGM could mean scaling production, cost increases, or inefficiencies. However, context is key.
COGM is not the same as COGS. COGM is the cost of the goods a business produces, and COGS is the cost of the goods a business sells.
COGM is a part of COGS (Cost of Goods Sold), which affects gross profit on the income statement.

Calculating the Cost of Goods Manufactured

Calculating the cost of goods manufactured involves summing all direct and indirect manufacturing costs and accounting for changes in work-in-progress (WIP) inventory.

The formula for the Cost of Goods Manufactured is:

COGM = Direct materials used in production + Direct labor + Manufacturing overhead + Beginning period WIP inventory - Ending period WIP inventory

Components of COGM

For a general overview, the elements concerned with COGS are the materials used in production, the cost of labor to manufacture the good, manufacturing costs essential to the product, and the amount of goods that are partially completed and then completed.

Let us understand these components one by one.

1. Direct materials used in production

These are the physical materials that are directly traceable to the product. The cost includes the beginning raw materials inventory and newly purchased raw materials, minus the ending inventory.

The formula for Direct material used in production is:

Beginning raw materials inventory + Raw materials purchased - Ending raw materials inventory = Direct materials used in production

2. Direct labor

This includes the wages paid to workers directly involved in the manufacturing process. Direct labor does not include the payroll costs of other company staff, such as janitors, accountants, management, etc.

3. Manufacturing overhead

This refers to all other production costs that cannot be directly traced to the final product but are still required for the production process. Examples include:

Depreciation of factory equipment
Factory rent and utilities
Maintenance of machines
Indirect labor and supplies
Salaries of managers and mechanics

4. Work-in-Progress (WIP) inventory

WIP is a current asset in the company’s balance sheet and represents the total value of all unfinished products.

For example, a shoe that requires 7 procedures, but only has three procedures acted upon. It would be considered WIP inventory.

Beginning period WIP Inventory: Cost of partially completed goods at the start of the period
Ending period WIP Inventory: Cost of partially completed goods at the end of the period

Example Calculation of Cost of Goods Manufactured (COGM)

A company has the following data for a given month. Let’s calculate the COGM.

Calculation of Cost of Goods Manufactured
Beginning Raw Materials Inventory	$10,000
Raw Materials Purchased	$25,000
Ending Raw Materials Inventory	$8,000
Direct Labor	$15,000
Manufacturing Overhead	$12,000
Beginning WIP Inventory	$5,000
Ending WIP Inventory	$6,000

Step 1: Calculate the direct materials used in production

$10,000 (Beginning raw materials inventory) + $25,000 (Raw materials purchased) - $6,000 (Ending raw materials inventory) = $27,000 (Direct materials used in production)

Step 2: Apply the COGM Formula

$27,000 (Direct materials used in production) + $15,000 (Direct labor) + $12,000 (Manufacturing overhead) + $5,000 (Beginning period WIP inventory) - $6,000 (Ending period WIP inventory) = $53,000 (COGM)

Traditionally, COGM would be manually calculated. However, manufacturing ERP software tracks all manufacturing costs and inventory movements, automatically calculating COGS and COGM, reducing manual errors, and increasing efficiency.

Difference between COGS and COGM

COGM is the summation of the costs of manufacturing the goods within a period.

COGS is the sum of the costs incurred by the company in manufacturing the goods it sells within a given period.

For example, a company could produce units of goods and sell 0 units within the accounting period, resulting in a massive COGM and COGS totaling 0.

The following table will explain the differences between COGM and COGS.

Differences between COGM and COGS
Metric	COGM (Cost of goods manufactured)	COGS (Cost of goods sold)
Definition	Total production cost of goods completed during the period	Total cost of goods sold during the period
Focus	Manufacturing process	Sales activity
Includes	Direct materials, direct labor, overhead, and WIP(work in progress) inventory	COGM + Beginning Finished Goods Inventory- Ending Finished Goods Inventory
Used for	Evaluating internal production efficiency and cost control	Gross profit calculation, financial reporting

The COGM to COGS formula is:

COGS = COGM + Beginning Finished Goods Inventory - Ending Finished Goods Inventory

Why is COGM Important?

The cost of goods manufactured is an important metric to track. It enables management to gain an overview of production costs and their correlation with the business's profitability.

For a company, COGM is essential because:

Accurate Financial Reporting: COGM is used in calculating COGS, which affects gross profit and net income
Price smarter: COGM helps you avoid guessing when pricing goods. Prices are set using data that ensures profitability and competitiveness
Manage inventory: A clear view of how much product is complete and work-in-progress. Avoid both overstocking and stockout
Boost profitability: Identify inefficiencies and correct them for improvement
Evaluating Competitiveness: COGM provides a clear picture of a company's performance both internally (for its past performance) and externally (for competitors). Provides insights into the business’s competitiveness against itself and similar entities

Conclusion

Cost of goods manufactured(COGM) is vital for businesses, especially for companies that produce physical goods. It indicates the total cost of producing a good that is available for sale, which includes raw material, labor, manufacturing overhead, and changes in work-in-progress (WIP) inventory.

It does not include non-manufacturing-related costs like marketing, administrative expenses, or unfinished goods at the end of the accounting period.

It is a valuable metric that helps businesses reveal production costs, aids budgeting/forecasting, and enables cost control and efficiency. It is also used for financial reporting and calculating COGS, ultimately determining operating income on the income statement.
In short, COGM is a valuable financial metric that relates a business's production operations to the company's overall financial profitability.