Evaluating the cost of goods manufactured (COGM) has its merits. Businesses need to run evaluation processes in different operation phases, and production is crucial.
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 what the cost of goods manufactured is.
What Is The Cost Of Goods Manufactured?
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.
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 was high or was it 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 –
|COGM = Beginning WIP inventory + total manufacturing cost – ending WIP inventory.
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.
Cost Of Goods Manufactured Mathematical Example
Here is a mathematical example of calculating the COGM –
|Opening Wip Inventory
|Closing Wip Inventory
|Cost Of Goods Manufactured =
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 an 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 providing a way for improved 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.
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.
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. if you want to calculate it in excel, you can see the video below –
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.
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.
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 there are any further queries, you can comment below.
Shahnawaz is a passionate and professional Content writer. He loves to read, write, draw and share his knowledge in different niches like Technology, Cryptocurrency, Travel,Social Media, Social Media Marketing, and Healthcare.