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Reconcialiation of COGM

This document discusses how to automatically reconcile the cost of goods manufactured (COGM) account in the financial system. It recommends setting up the general ledger account structure and business processes to ensure COGM is only impacted by inventory, production variance, and revaluation transactions. Periodic reconciliation should check that the COGM balance equals the change in inventory plus cost of goods sold and any production variances or revaluations. Conducting regular period-end costing activities also helps ensure automatic reconciliation of COGM.

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Chandrababu Naidu Boyapati
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396 views6 pages

Reconcialiation of COGM

This document discusses how to automatically reconcile the cost of goods manufactured (COGM) account in the financial system. It recommends setting up the general ledger account structure and business processes to ensure COGM is only impacted by inventory, production variance, and revaluation transactions. Periodic reconciliation should check that the COGM balance equals the change in inventory plus cost of goods sold and any production variances or revaluations. Conducting regular period-end costing activities also helps ensure automatic reconciliation of COGM.

Uploaded by

Chandrababu Naidu Boyapati
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Auto reconciliation of cost of goods manufactured (COGM)

Finance
Best Practices
Auto Reconciliation of Cost of Goods Manufactured

1 | Finance | Best Practices | Auto reconciliation of cost of goods manufactured (COGM)

Auto reconciliation of cost of goods manufactured (COGM)


Abstract

Cost of goods manufactured (COGM) represents cost incurred for


manufacturing total quantity of finished and semi finished goods over a
given reporting period, It includes material cost and conversion cost for
manufacturing.
Why is reconciliation of COGM required?

Cost of goods manufactured (COGM) has a direct impact on


strategic decisions like pricing.

Value of goods (finished/semi finished) manufactured must


reconcile with direct & indirect expenses incurred for production.

Completeness of financial posting


production variance accounts.

Appropriate presentation of financial statements w.r.t. followings


o Raw material consumption
o Conversion cost
o Overhead cost
o Production variance

in

COGM

accounts

&

How to reconcile COGM?


Cost of goods manufactured
=
Closing stock of manufactured inventory
+

Cost of goods delivered/consumed

Production variance/revaluation of inventory

(-)

Opening stock of manufactured inventory

What if COGM is not reconciled?

Reason for difference in COGM need to be worked out manually.

Posting of manual financial entry required to reconcile COGM.

Actual cost of goods manufactured not available from accounts.

2 | Finance | Best Practices | Auto reconciliation of cost of goods manufactured (COGM)

Auto reconciliation of cost of goods manufactured (COGM)

Applicability

Business Impact /
Benefits

Problem definition

Process

Applicable on following process of manufacturing businesses;

Preparation of trial balance & financial statements

MIS reporting for actual cost of goods manufactured.

ZERO manual financial entry for reconciliation of COGM.

Auto reconciliation of COGM account balance with Inventory


difference (closing & opening) cost of goods sold & production
variance/revaluation of inventory.

Reduce cycle time for preparation of trial balance & financial


statement at period end & year end.

Why COGM account balance do not get reconciled automatically?

Posting of processed/finished inventory balance


account

in wrong GL

Cost of goods manufactured posted to wrong GL account, at the


time of goods receipt by production confirmation.

Production variance account used for posting other than


production variance & revaluation of manufactured inventory.

Manual posting in inventory a/c, COGM a/c. & production


variance a/c.

Settlement of process order not executed as part of period end


activities by costing team.

Transfer of processed stock from one profit centre to another


profit centre.

How to ensure auto reconciliation of COGM account balance?

Process of posting in COGM & Inventory accounts:


a. In ERP system (SAP) posting in COGM account & Inventory
accounts are automatic and based on following business
processes only:
i. FG & SFG Inventory: On production confirmation by
production team at day/shift end.

3 | Finance | Best Practices | Auto reconciliation of cost of goods manufactured (COGM)

Auto reconciliation of cost of goods manufactured (COGM)

FG/SFG Inventory A/c. Dr.


To COGM
A/c Cr.
ii. Production variance: On settlement of process orders
by costing team at period end.
Production variance A/c. Dr/Cr
To COGM
A/c. Dr/Cr
iii. Revaluation of inventory: On Price change of finished
(FG) & semi-finished (SFG) inventory by Finance &
Costing team at required interval.
Revaluation of Inventory
To FG/SFG Inventory

A/c. Dr/Cr
A/c. Dr/Cr

iv. Delivery of inventory: On dispatch of finished (FG) &


semi-finished (SFG) inventory to customer by logistic
& marketing team at required point.
Cost of goods sold (COGS)
To FG/SFG Inventory

A/c. Dr
A/c. Cr

v. Transfer of inventory between profit centres: On


transfer of finished (FG) & semi-finished (SFG)
inventory to another profit centre, by logistic team at
required point.
FG/SFG Inventory
A/c. Dr (Receiver Profit centre)
To FG/SFG Inventory A/c. Cr (Sender Profit centre)
Based on above business process it is noted that posting
In COGM accounts can come only in case of
Production confirmation of manufactured inventory
Settlement of process order.
In Inventory accounts can come only in case of
Production confirmation of manufactured inventory
Revaluation of inventory
Delivery of inventory to customer
Inter profit centre transfer of inventory

4 | Finance | Best Practices | Auto reconciliation of cost of goods manufactured (COGM)

Auto reconciliation of cost of goods manufactured (COGM)

One time set up process for COGM reconciliation:


a. Checking of posting w.r.t. following accounts for finished and
semi-finished
(manufactured
inventory)
inventory
to
appropriate accounts. Apart from FG and SFG inventory
quantity no other inventory quantity transaction need to be
posted in following accounts.
i. FG Inventory accounts
ii. SFG Inventory accounts
iii. Production variance accounts
iv. Revaluation of inventory accounts
v. Cost of goods sold accounts
vi. Cost of goods manufactured accounts
b. Assignment of correct GL account if found any in-correct
assignment of GL w.r.t inventory, GOGS, COGM, production
variance, revaluation of inventory,
c. The GL account correction process is system (SAP) should be
done in association with support partner and central help
desk team. As during the correction time span (ranging from
1-2 hour) there should not be any business transaction for
respective inventory codes which are under correction.
d. If we are changing the FG/SFG inventory GL account for
some inventory codes then the existing stock of those
inventory codes must be removed from system before
change in GL accounts, Afterwards on completion of GL
account change in system the stock quantity need to be
uploaded in system to avoid any inconsistency.
e. Blocking of above mentioned accounts for any manual
postings in system (SAP) by any business users.

Regular process for COGM reconciliation:


a. Execution of process order settlement and other period end
activities for costing process.
Example of these activities are
i.
Allocation of cost centre cost
ii.
Actual activity type rate computation
iii.
Revaluation of process order
iv.
Variance calculation of process order
v.
Settlement of process order

5 | Finance | Best Practices | Auto reconciliation of cost of goods manufactured (COGM)

Auto reconciliation of cost of goods manufactured (COGM)

b. Identify the transaction of inter profit centre transfer of


inventory. Consider this transaction value as reconciliation
item of COGM for both profit centres. As inventory accounts
are debited and credited without the use of COGM accounts in
this inter profit centre transfer of inventory transaction.
c. Periodic reconciliation of COGM: Business users must ensure
that balance of COGM should match with sum of following:
i.

Delta of inventory balance (Closing & Opening)

ii.

Cost of goods sold FG & SFG /Consumption of SFG

iii.

Production variance & Revaluation of inventory

About Author*

Sarat Agrawal (Director & C.E.O)

Contact details*

[email protected]

Key words

Finance best practice, Auto reconciliation of Cost of goods manufactured


(COGM).

6 | Finance | Best Practices | Auto reconciliation of cost of goods manufactured (COGM)

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