Ever wondered what it really costs to make the products you sell? That’s where the Cost of Goods Manufactured (COGM) comes in. It is the total expense of producing goods over a set period.

COGM includes expenses like materials, labor, and overhead costs, adjusted for any changes in work-in-progress (WIP) inventory. Basically, it gives you a clear picture of your production costs.

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Why Does COGM Matter?

COGM is super useful for a few reasons:

• Spot Production Issues: It helps you figure out where your production process might be inefficient.
• Know Your Profits: You need COGM to calculate the Cost of Goods Sold (COGS), which is key to knowing your gross profit.
• Control Expenses: By breaking down costs, you can see where to save money.
• Set the Right Price: Knowing your production costs ensures you price your products to cover them and make a profit.

What Goes Into COGM?

Here are the main components:

• Direct Materials: These are the raw materials you use to create your product. It’s the stuff you can directly see in the finished item.
• Direct Labor: This is the cost of paying the people who actually make your products.
• Manufacturing Overhead: These are all the other costs that go into production, like utilities, equipment maintenance, and factory rent.
• Beginning WIP Inventory: This is the value of the products that were partially finished at the start of the period.
• Ending WIP Inventory: This is the value of the products that is still in progress at the end of the period.

The COGM Formula

Here’s the basic formula:

COGM = Direct Materials Used + Direct Labor + Manufacturing Overhead + Beginning WIP Inventory − Ending WIP Inventory

Example Calculation

Let’s say you have these numbers:

• Direct Materials Used: $70,000

• Direct Labor: $40,000

• Manufacturing Overhead: $25,000

• Beginning WIP Inventory: $15,000

• Ending WIP Inventory: $8,000

Plugging them into the formula:

COGM = $70,000 + $40,000 + $25,000 + $15,000 − $8,000

COGM = $142,000

So, the total cost to produce your goods for this period is $142,000. Simple, right? This number feeds directly into calculating your COGS.

How COGM Connects to COGS

Once you’ve got your COGM, you’re halfway to figuring out your COGS. Here’s the formula:

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

This shows the total cost of the products you actually sold during the period.

Step-by-Step: How to Calculate COGM

If you’re ready to calculate COGM, here’s how to do it:

Work Out Direct Materials Used:

• Add up your starting raw materials inventory and what you bought during the period.
• Subtract what’s left at the end.

Total Up Manufacturing Costs:

• Add your direct materials, direct labor, and manufacturing overhead together.

Adjust for WIP Inventory:

• Add your beginning WIP inventory and subtract your ending WIP inventory.
• The final number is your COGM.

Real-Life Uses for COGM

Here’s why COGM is more than just an accounting formula:

• Plan Budgets: It’s a key tool for predicting future production costs.
• Check Performance: Compare your COGM to industry benchmarks to see how you stack up.
• Make Decisions: Use COGM insights to decide on scaling production, cutting costs, or investing in new tools.

The Cost of Goods Manufactured is a must-know for anyone in manufacturing. It gives you a clear view of what it costs to make your products and helps you manage your business better.