Mastering Cost of Goods Manufactured (COGM) Calculation for Optimal Profitability in Manufacturing Business

cost of goods manufactured

total cost of work in process – cost of ending work in process inventory

Cost of goods manufactured (COGM) refers to the total cost that is incurred during the production process of the goods that are completed and available for sale during the period. COGM is calculated by adding all the production costs that are incurred during the period and subtracting the cost of goods that are not finished at the end of the period.

The following are the steps involved in calculating the cost of goods manufactured:

1. Direct materials: This includes the cost of raw materials that are used in the production process. Direct materials costs are the most easily traceable costs and are directly added to the COGM.

2. Direct labor: This includes the cost of the employees who are involved in the production process. Direct labor costs are also easily traceable and are added to COGM.

3. Manufacturing overhead: This includes the indirect costs incurred during the production process, such as rent, utilities, and salaries of administrative employees. These costs are allocated to the COGM using a predetermined allocation rate.

4. Beginning inventory: This is the value of the finished goods that are in inventory at the beginning of the period.

5. Ending inventory: This is the value of the finished goods that are in inventory at the end of the period.

To calculate COGM, the following formula is used:

COGM = Beginning inventory + Total manufacturing costs – Ending inventory

Total manufacturing costs include direct materials, direct labor, and manufacturing overhead.

In summary, the cost of goods manufactured is the total cost of producing finished goods during a specific period of time. It is an important measure of efficiency and profitability for manufacturers, and is used to determine the cost of goods sold and the gross margin of the business.

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