Cost of Goods Manufactured (COGM)

What is Cost of Goods Manufactured?

Cost of goods manufactured is the total production cost of goods produced and completed by the company during an accounting period. Typically, businesses whose principal line of business is manufacturing create a separate schedule to calculate the cost of goods manufactured in order to determine their cost-effectiveness.

Cost of Goods Manufactured Formula

The cost of goods manufactured formula is represented as follows,

Cost of Goods Manufactured = Direct Materials Cost (+)  Direct Labor Cost (+)   Manufacturing Overhead (+)  Beginning WIP Inventory (-)  Closing WIP Inventory

Cost-of-Goods-Manufactured-Formula

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Explanation

The Cost of goods manufactured can be calculated by summing up the total cost of manufacturing; that shall include all direct labor costsAll Direct Labor CostsDirect labor costs refer to the total cost incurred by the company for paying the wages and other benefits to its employees against the task performed by them, which are straight away related to the manufacturing of the products or provision of the services.read more, direct materials cost, and other factories’ overhead costsOverhead CostsOverhead cost are those cost that is not related directly on the production activity and are therefore considered as indirect costs that have to be paid even if there is no production. Examples include rent payable, utilities payable, insurance payable, salaries payable to office staff, office supplies, etc.read more; to the opening work-in-process stock and then deducting the ending inventoryEnding InventoryThe ending inventory formula computes the total value of finished products remaining in stock at the end of an accounting period for sale. It is evaluated by deducting the cost of goods sold from the total of beginning inventory and purchases.read more in the process stock. This is nothing but the cost sheet of the company, and it includes prime cost as well. Hence adding all of the manufactured stage inventory and all the direct expenses will sum up to cost of good manufactured and when one divides the same by the number of units produced will yield the cost of goods manufactured.

Examples

You can download this Cost of Goods Manufactured Formula Excel Template here – Cost of Goods Manufactured Formula Excel Template

Example #1

PQR Ltd. has produced the following details from its production department. You are required to calculate the cost of goods manufactured.

  • Direct Material: 800000
  • Direct Labor: 1200000
  • Factory Overheads: 2200000
  • Opening WIP Inventory: 600000
  • Closing WIP Inventory: 480000

Solution

Therefore, the calculation of the cost of goods manufactured is as follows,

Cost of Goods Manufactured Formula Example 1.1
  • =  8,00,000 + 12,00,000 + 22,00,000 +6,00,000 – 4,80,000

Cost of Goods Manufactured will be –

Cost of Goods Manufactured Formula Example 1.2
  • Cost of Goods Manufactured = 43,20,000

Example #2

Mr. W has been working in the FEW manufacturing, and he has been asked to work upon to create the cost sheet of the Product “FMG” and present the same in the next meeting. The following details have been obtained from the production department.

  • Number of Units: 500
  • Material Cost Per Unit: 250
  • Labor Cost Per Unit: 200
  • Factory Overheads: 250000
  • Opening WIP Inventory: 79000
  • Closing WIP Inventory: 63200

Based on the above information, you are required to calculate the cost of goods manufactured.

Solution

Here we are not given directly Material and Labor CostLabor CostCost of labor is the remuneration paid in the form of wages and salaries to the employees. The allowances are sub-divided broadly into two categories- direct labor involved in the manufacturing process and indirect labor pertaining to all other processes.read more. We need to calculate the same first.

We just need to multiply the cost per unitCost Per UnitCost per unit is defined as the amount of money spent by a corporation over a period of time to produce a single unit of a specific product or service, and it takes into account two components in its calculation: variable and fixed costs. It aids in determining the selling price of the company's product or services.read more by the number of units as per below:

Calculation of Material and Labor Cost

Cost of Goods Manufactured Formula Example 2.1
  • Material Cost = 250 x 500
  • =125,000
  • Labor Cost =  200 x 500
  • = 100,000

Therefore, the calculation of the cost of goods manufactured is as follows,

Cost of Goods Manufactured Formula Example 2.2
  •  = 125,000 + 100,000 + 250,000 + 79,000 – 63,200

Cost of Goods Manufactured will be –

Example 2.3

Hence, the cost of goods manufactured will be 490,800.

Example #3

Starc industries have started to manufacture a new product called “Avenger Sword.” It will be used during war times and is designed in such a way that it can be used as a sword and as well as a shield. However, being a nonprofit organization, they are not worried about its pricing. But in order to continue production, they need to at least recover the cost. Hence the management of the starc industries has asked the production department to send over the cost incurred while producing the newly invented product “Avenger Sword.”

Below are the details provided by the production department:

  • Number of Units: 100
  • Material Cost Per Unit: 491250
  • Labor Cost Per Unit: 378000
  • Factory Overheads: 43750000
  • Opening WIP Inventory: 29862000
  • Closing WIP Inventory: 23889600

The above details are in US$ and in thousands. You are required to calculate the cost of goods manufactured and also per unit costUnit CostUnit cost is the total cost (fixed and variable) incurred to produce, store and sell one unit of a product or service. It is calculated by adding fixed and variable expense and dividing it by the total number of units produced.read more.

Solution

Here we are not given directly Material and Labor CostLabor CostCost of labor is the remuneration paid in the form of wages and salaries to the employees. The allowances are sub-divided broadly into two categories- direct labor involved in the manufacturing process and indirect labor pertaining to all other processes.read more. We need to compute the same first.

We just need to multiply the cost per unitCost Per UnitCost per unit is defined as the amount of money spent by a corporation over a period of time to produce a single unit of a specific product or service, and it takes into account two components in its calculation: variable and fixed costs. It aids in determining the selling price of the company's product or services.read more by the number of units as per below:

Calculation of Material and Labor Cost

Cost of Goods Manufactured Formula Example 3.1
  • Material Cost = 491,250 x 100  = 49,125,000
  • Labor Cost = 378,000 x 100 = 37,800,000

Therefore, the calculation of the cost of goods manufactured is as follows,

Example 3.2

=  49,125,000 + 37,800,000+ 4,37,50,000 + 2,98,62,000 – 2,38,89,600

Cost of Goods Manufactured will be –

Example 3.3
  • Cost of Goods Manufactured = 13,66,47,400

Hence, the cost of goods manufactured will be  13,66,47,400 and per unit, it will be 1,366,474 when divide it by 100.

Relevance and Uses

Cost of Goods Manufactured or Manufacturing Account calculations serve the following purposes:

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