What is the Cost of Goods Manufactured?
Cost of Goods Manufactured is the value of the total production cost of goods that the company produced and completed during the particular accounting period under consideration and is calculated by adding the direct material costs, direct labor costs, and manufacturing overhead costs of all the goods that were manufactured and completed during the period.
It is a schedule or statement through which a company or entity calculates its cost incurred to manufacture a product and convert it to a finished product. Usually, entities whose primary business line is manufacturing prepare it. These manufacturing entities typically prepare this as a separate account or statement to assess the cost-effectiveness of manufacturing activity, which later forms a part of the final accounts.
Manufacturing costs classify into:
If any unfinished goods remain at the beginning and end of the accounting period cost of such unfinished goods, which is also called work in process, is shown in the Cost of Goods Manufactured (COGM). It shows as Opening stock of work in process in the debit side of the account statement. And the Closing stock of work in process on the credit side of the account statement.
#1 – Direct Manufacturing Expenses
These are costs that include other than material or wage expenses. These incur for a specific product or saleable service. Example: (i) Royalties for using license or technology (ii) Hire charge of the plant/machinery etc.
A factory produces 10000 units. Per unit material cost is $10; per unit labor cost is $5. Apart it was agreed to pay royalty @ $3 per unit to the Japanese collaboration who supplied the technology.
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In this case, prime cost comprises of:
#2 – Indirect Manufacturing Expenses or Manufacturing Overhead Expenses
It is also called Production overhead, works overhead, etc.. Overhead is the total cost of indirect – material, wages, and expenses. Indirect material, wages, and expenses mean materials, wages, and expenses, which cannot be linked directly with the units produced.
Example of indirect material is stores consumed for repair and maintenance work, small tools, fuel, and lubricating oil, etc. Examples of indirect wages are wages for maintenance work, holding pay, etc. Example of an indirect expense is training expense, depreciation of factory shed, the insurance premium for plant and machinery, factory shed, etc.
In most manufacturing operations, the production of the main product is accompanied by the production of a sub-product, which has a specific value on sale. Another term for sub-product is by-product because its production is not consciously undertaken but results out of the production of the main or primary product. An example is (i) molasses is by-product of sugar, (ii) buttermilk is the by-product of a dairy which produces butter and cheese, etc.
It is usually difficult to ascertain the cost of the product. Moreover, its value usually forms a small portion of the main product. Treatment of such income is as “Miscellaneous Income.” Still, the correct treatment would be to credit the sale value of the by-product to manufacturing account to reduce to that extent the cost incurred to manufacture the main product.
M/s ABC produces soaps in their factory. The following are the details available about the manufacturing activities year ended 31.03.2017. Prepare and Calculate Cost of Goods Manufactured Statement for company ABC year ended 31.03.2017.
#1 – Working Note 1 (WN1) – Direct Wages
- Direct wages contracted @$0.80 per unit manufactured = 500000 units @ $0.80 = $4, 00,000
- Direct wages contracted @ $0.40 per unit of closing WIP = 12000 units $Re. 0.40 = $4,800
- Total Direct Wages = $400000+$4800 = $404,800
#2 – Working Note 2 (WN2) – Hire charges
- Hire charges of machine @$0.60 per unit manufactured = 500000 @ $0.60 = $300,000
Cost of Goods Manufactured or Manufacturing Account calculations serve the following purposes:
- It sets out in detail the appropriate classification of the elements of cost.
- Facilitates reconciliation of financial books with cost records;
- Serves the basis of comparison of manufacturing operations from year to year;
- It shall allow the entity to plan its product pricing strategy, resource utilization planning, volume producing planning, etc.
- The use of it may also be to fix the amount of production of profit-sharing bonuses when such schemes are in force.
Critical Points of Cost of Goods Manufactured Statement (COGM)
- It is easier with the availability of the quantity and values to compute the related information required.
- This account shows the number of raw materials in stock at the beginning and end of the year and purchases during the year.
Ascertaining the cost of goods manufactured is a crucial factor for ascertaining various other financial components of the product. Though, one may observe that nowadays, no manufacturing business or entity prepares a manufacturing account as part of its final sets of accounts. The items of the COGM are shown either in the trading account or P&L account.
This article has been a guide to what is the Cost of Goods Manufactured and its definition. Here we discuss COGM Statement along with practical examples. You can learn more about accounting from following articles –