What is the Cost of Goods Manufactured (COGM)?
The Cost of Goods Manufactured (COGM) represents the total costs incurred in the process of converting raw material into finished goods.
The COGM formula starts with the beginning-of-period work in progress inventory (WIP), adds manufacturing costs, and subtracts the end-of-period WIP inventory balance.
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How to Calculate Cost of Goods Manufactured (COGM)
COGM stands for “cost of goods manufactured” and represents the total costs incurred throughout the process of creating a finished product that can be sold to customers.
The cost of goods manufactured (COGM) is one of the inputs necessary to calculate a company’s end-of-period work in progress (WIP) inventory, which is the value of inventory currently in a production process stage.
WIP represents any partially-complete inventory that is not yet marketable, i.e. they have not yet become finished products ready to be sold to customers.
COGM is thereby the dollar amount of the total costs incurred in the process of manufacturing products.
The process of calculating COGM is a three-step process:
- Step 1 → Calculating COGM begins by finding the beginning WIP balance, i.e. “Beginning” refers to the beginning of the period, while “Ending” is the balance as of the end of the period.
- Step 2 → From the beginning WIP inventory balance, the total manufacturing costs in the period are added.
- Step 3 → In the final step, the ending WIP inventory is deducted, and the remaining amount is a company’s COGM.
The following are the common items included within total manufacturing costs:
- Direct Raw Material Cost
- Direct Labor Cost
- Factory Overhead
Cost of Goods Manufactured Formula
Before we delve into the COGM formula, reference the formula below that calculates a company’s end-of-period work in progress (WIP) balance.
Ending Work in Progress (WIP) Formula
- Ending Work in Progress (WIP) = Beginning WIP + Manufacturing Costs – Cost of Goods Manufactured
The beginning work in progress (WIP) inventory is the ending WIP balance from the prior accounting period, i.e. the closing carrying balance is carried forward as the beginning balance for the next period.
Manufacturing costs refer to any costs incurred during the process of manufacturing a finished product and include the 1) cost of raw materials, 2) direct labor, and 3) overhead costs.
Manufacturing Costs Formula
- Manufacturing Costs = Raw Materials + Direct Labor Costs + Manufacturing Overhead
Once the manufacturing costs have been added to the beginning WIP inventory, the remaining step is to deduct the ending WIP inventory balance.
Putting the above together, the formula for calculating the cost of goods manufactured (COGM) metric is as follows.
Cost of Goods Manufactured Formula
- Cost of Goods Manufactured = Beginning WIP Inventory + Manufacturing Costs – Ending WIP Inventory
COGM vs. Cost of Goods Sold (COGS)
In spite of the similarities in the names, the cost of goods manufactured (COGM) is not interchangeable with the cost of goods sold (COGS).
COGM is assigned to units in production and is inclusive of WIP and finished goods not yet sold, whereas COGS is only recognized when the inventory in question is actually sold to a customer.
For example, a manufacturer could intentionally produce units in advance in anticipation of a spike in seasonal demand.
While unrealistic, let’s assume that not a single unit was sold in the current month.
For that month, COGM could be substantial, whereas COGS is zero because no sales were generated.
Cost of Goods Manufactured Calculator – Excel Template
We’ll now move to a modeling exercise, which you can access by filling out the form below.
Cost of Goods Manufactured Example Calculation
Suppose a manufacturer is attempting to calculate its cost of goods manufactured (COGM) for 2021, its most recent fiscal year.
The beginning work in progress (WIP) inventory balance for 2021 will be assumed to be $20 million, which was the ending WIP inventory balance from 2020.
The next step is to calculate the total manufacturing costs, which are comprised of the following:
- Raw Material Costs = $20 million
- Direct Labor Costs = $20 million
- Factory Overhead = $10 million
The sum of those three costs, i.e. the manufacturing costs, is $50 million.
- Manufacturing Costs = $20 million + $20 million + $10 million = $50 million
The list below outlines the remaining assumptions that we will use to calculate COGM.
- Beginning Work in Progress (WIP) = $40 million
- Manufacturing Costs = $50 million
- Ending Work in Progress (WIP) = $46 million
If we enter those inputs into our WIP formula, we arrive at $44 million as the cost of goods manufactured (COGM).
- Cost of Goods Manufactured (COGM) = $40 million + 50 million – $46 million = $44 million