On the cost of goods manufactured schedule, the cost of goods manufactured agrees with the

Q: How the cost of goods manufactured relates to the cost of goods sold?

The cost of goods manufactured is similar to a retailers cost of goods purchased. Hence a manufacturers cost of goods sold is computed as: The cost of the beginning finished goods inventory. PLUS the cost of the goods manufactured.

The cost of goods manufactured in the calculation of the total production cost of the company at a specific point in time. As the name suggests, the COGM calculates the total manufacturing cost incurred on a product that has been manufactured and is ready to be sold. It considers all the expenses as direct material, direct labor, and factory overheads incurred on producing the goods.

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Explanation
How to Calculate Cost of Goods Manufactured
Example of Cost of Goods Manufactured
Cost of Goods Manufactured Schedule
Disadvantages
Recommended Articles
What is the schedule of cost of goods manufactured?
What is the cost of goods manufactured?
How the cost of goods manufactured relates to the cost of goods sold?

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Explanation

The cost of goods manufacture (COGM) is comprised of various components. It includes direct labor costs, direct material costs, and factory overheads. The sum total of all three components is added to the net finished goods inventory, i.e., opening work-in-progress inventory minus closing work-in-progress goods inventory. The term COGM should not be confused with the cost of goods sold (COGS). COGM is the total cost of manufactured goods ready for sale. At the same time, COGS is the total cost of goods manufactured during the period added to the net unsold finished goods inventory (opening finished goods inventory – closing finished goods inventory).

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The formula for the Cost of Goods Manufactured.

The formula of COGM is as follows:

Cost of Goods Manufactured = Total Manufacturing Cost + Opening Work in Process Goods Inventory – Closing Work in Process Goods Inventory

Wherein,

Total Manufacturing Cost = Direct Material Cost + Direct Labour Cost + Factory Overheads

How to Calculate Cost of Goods Manufactured

The step-wise step method to calculate COGM is as follows:

Step 1: Determination of Indirect and Direct Cost: Since the calculation of the cost of goods manufactured includes both direct and indirect cost components, therefore, in the first step, we will have to determine all the indirect costs like facilities, equipment, warehousing, etc. related to manufacturing and all direct cost like direct labor cost and direct material cost.
Step 2: Calculation of Total Manufacturing Cost: After determining all the direct and indirect costs incurred in the manufacturing process, we need to add them up to get the figure for total manufacturing cost for the specific period.
Step 3: Opening Workinprogress Goods Inventory: In the next step, we will have to determine the opening value of the work-in-progress inventory. It would be the same as the closing work-in-progress inventory of the last period.
Step 4: Closing Workinprogress Inventory: In this step, we need to determine the total value of ending or closing work-in-progress inventory.
Step 5: Cost of Goods Manufactured: In this final step, we will add the total manufacturing cost to the opening work-in-progress inventory, and deducting the value of the closing work-in-progress inventory from the total will give us the value of the COGM.

Example of Cost of Goods Manufactured

ABC Limited company wants to calculate the cost of goods manufactured for the year and provides the following information regarding its direct and indirect costs:

Direct material = $4,000
Direct labor= $2,000
Factory/ manufacturing overhead = $5,000
Opening work-in-progress (WIP) inventory was $1,000, and closing or ending work-in-progress (WIP) inventory was $3,000 for the year.

Solution:

Total Manufacturing Cost is calculated using the formula given below:

Total Manufacturing Cost = Direct Material Cost + Direct Labor Cost + Factory Overheads

Total Manufacturing Cost = $(4,000 + 2,000 + 5,000)
Total Manufacturing Cost = $11,000

COGM is calculated using the formula given below:

Cost of Goods Manufactured = Total Manufacturing Cost + Opening WIP Inventory – Closing WIP Inventory

Cost of Goods Manufactured = $11,000 + $ 1,000 – $ 3,000
Cost of Goods Manufactured = $9,000

Therefore, the total COGM for the year is $9,000

Cost of Goods Manufactured Schedule

The cost of goods manufactured schedule is prepared to calculate the total manufacturing cost for the period, which is then added to the net work-in-progress inventory. Below is the general sample schedule that can be used to calculate the COGM.

Direct Material costD(A+B -C)Opening raw materialAADD: raw material purchasedBLess: Closing Raw materialCDirect Labour costEFactory overheadF(G+H+I)Indirect MaterialGIndirect LabourHDepreciation, Insurance, taxesIAdd: Opening Work in progress inventory.JLess: Closing Work in progress inventoryKCost of Goods ManufacturedD+E+F+J-K

Importance

The importance of COGM can be explained from the below points:

First, the COGM gives information regarding each cost element involved in the manufacturing process, which helps further analyze each component.
COGM helps the company maximize its net income by providing a detailed view and analysis of each component of manufacturing cost.
It helps the company plan and devise its price strategies for different products; it also helps compare manufacturing operations from one period to the other.

Advantages

Some of the advantages are given below:

It gives the companies an idea of whether their production cost is too high or too low compared to their sale.
It helps the company plan and modifies its price strategies for different products.
It helps the company to apply measures for optimum utilization of the inventory and other resources used.

Disadvantages

Some of the disadvantages are given below:

COGM includes direct and indirect costs, as the process does not use direct allocation, i.e., the application of the specific amount of each type of cost to the individual product. Hence, it may lead to over-pricing or underpricing of the products.
Calculation of work-in-progress inventory is a little complicated and sometimes done on an estimation basis which leads to an inaccurate result of cost and also leads to inefficient management of the inventory.
Failing to calculate correct COGM will lead to incorrect calculation of the cost of goods sold and inaccurate pricing strategy and planning.

Conclusion

COGM is one of the critical components of process costing. It helps calculate the cost of goods sold, which is used to calculate gross profit. The calculation at first seems simple but is a little tricky and should be carefully looked upon by management and cost accountants because any inaccuracy would lead to a series of mistakes and overshadow all of its plus points.

What is the schedule of cost of goods manufactured?

The cost of goods manufactured schedule reports the total manufacturing costs for the period that were added to work‐in‐process, and adjusts these costs for the change in the work‐in‐process inventory account to calculate the cost of goods manufactured.

What is the cost of goods manufactured?

Cost of Goods Manufactured (COGM) is a term used in managerial accounting that refers to a schedule or statement that shows the total production costs for a company during a specific period of time.

How the cost of goods manufactured relates to the cost of goods sold?

The cost of goods manufactured is similar to a retailer's cost of goods purchased. Hence a manufacturer's cost of goods sold is computed as: The cost of the beginning finished goods inventory. PLUS the cost of the goods manufactured.