The Cost of Goods Manufactured Schedule

Cost of Goods Manufactured, also known to as 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.

The cost of goods manufactured schedule is used to calculate the cost of producing products
for a period of time.

The cost of goods manufactured amount is transferred to the finished goods inventory account
during the period and is used in calculating cost of goods sold on the income statement.

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.

The formula to calculate the COGM is:

Add: Direct Materials Used

Add: Direct Labor Used

Add: Manufacturing Overhead

Add: Beginning Work in Process (WIP) Inventory

Deduct: Ending Work in Process (WIP) Inventory

= COGM

Example calculation of Cost of Goods Manufactured (COGM)

This can be more clearly seen in a T-account. For example, let’s say that a company that
manufactures furniture incurs the following costs:

Direct Materials: $100,000

Direct Labor: $50,000

Manufacturing Overhead: $60,000

Beginning WIP Inventory: $10,000

Ending WIP Inventory: $30,000

Work in Process (WIP) Inventory

Beginning Balance 10,000

Direct Materials 100,000

190,000* C
Direct Labor 50,000

Manufacturing Overhead 60,000

Ending Balance 30,000

With this information, we can solve for COGM, which is on the credit side of the WIP Inventory
T-Account.

COGM = 10,000 + 100,000 + 50,000 + 60,000 – 30,000 = $190,000*

Determining Direct Materials Used

In order to determine the actual direct materials used by the company for production, we must
consider the Raw Materials Inventory T-account. Raw materials inventory refers to the inventory
of materials that are waiting to be used in production. For example, if a company were to make a
raw material purchase for use, these would be stored in the debit side of the raw materials
inventory T-Account.

In addition, if a specific number of raw materials were requisitioned to be used in production,

this would be subtracted from raw materials inventory and transferred to the WIP Inventory.
Raw materials inventory can include both direct and indirect materials. Beginning and ending
balances must also be used to determine the amount of direct materials used. Let’s also examine
the following raw materials T-account.

Raw Materials Inventory

Beginning Balance a
d Raw materials used in production
Purchases of Raw Materials b

Ending Balance c

The raw materials used in production (d) are then transferred to the WIP Inventory account to
calculate COGM.

Determining Direct Labor and Manufacturing Overhead

Determining how much direct labor was used in dollars is usually straightforward for most
companies. With time logs and time sheets, companies just take the number of hours worked
multiplied by the hourly rate. For information on calculating for manufacturing overhead, refer
to the Job order costing.

Manufacturing overhead is all indirect costs incurred during the production process. This
overhead is applied to the units produced within a period. Example include Depreciation on
equipment used in the production process, Property taxes on the production facility, Rent on the
factory building, Salaries of maintenance personnel, Salaries of manufacturing managers,
Supplies not directly associated with products (such as manufacturing forms), Utilities for the
factory.

Linking COGM to COGS

Finally, once all the individual parts are calculated and used to figure out the total cost of goods
manufactured for the year, this COGM value is then transferred to a final inventory account
called the Finished Goods Inventory account, and used to calculate Cost of Goods Sold. Finished
Goods Inventory, as the name suggests, contains any products, goods, or services that are fully
ready to be delivered to customers in final form. The following T-account shows the Finished
Goods Inventory. Beginning and ending balances must also be considered, similar to Raw
materials and WIP Inventory.

inished Goods Inventory

Beginning Balance a
d Cost of Goods Sold
Cost of Goods Manufactured b

Ending Balance c

With all the pieces together, we can construct a full Schedule of Cost of Goods Manufactured
and Cost of Goods Sold.

Final Cost of Goods Manufactured (COGM) formula

Schedule of Cost of Goods Manufactured

For the Year Ended December 31, 2017

Direct Materials
Beginning Raw Materials Inventory a

Add: Purchases of raw materials b

Deduct: Ending Raw Materials Inventory c

Direct Materials used in production d=a+b–c

Direct Labor e

Manufacturing Overhead f

Total Manufacturing costs g=d+e+f

Add: Beginning WIP Inventory h

Deduct: Ending WIP Inventory i

Cost of Goods Manufactured for the Year j=g+h–i

Add: Beginning Finished Goods Inventory k

Deduct: Ending Finished Goods Inventory l

Cost of Goods Sold m=j+k–l

Why is COGM important for companies?

In general, having the schedule for Cost of Goods Manufactured is important because it gives
companies and management a general idea of whether production costs are too high or too low
relative to the sales they are making.

For example, if a company earned $1,000,000 in sales revenue for the year and incurred
$750,000 in Cost of Goods Sold, they might want to look at ways to reduce their manufacturing
costs to increase their gross margin percentage.

Comparatively, if another company earned $800,000 in sales revenue and incurred only
$400,000 in COGS, even though the company’s sales were lower, their gross margin percentage
is much higher, which makes the latter company substantially more profitable.

Therefore, by having a general picture of what the company is incurring in terms of

manufacturing costs in all its specific components of materials, labor, and overhead,
management can examine these areas more thoroughly to make any necessary adjustments or
changes to maximize the company’s net income.
Prime cost:
Prime costs are a firm's expenses directly related to the materials and labor used in production.
It refers to a manufactured product's costs, which are calculated to ensure the best profit margin
for a company. ... Direct costs do not include indirect expenses, such as advertising and
administrative costs.

Conversion cost:
conversion costs are the costs of direct labor and manufacturing overhead used to convert raw
materials into a finished product.

Cost Categories of a Manufactured Product

Prime costs and conversion costs pertain to the three cost categories of a manufactured product:

 Direct materials

 Direct labor

 Manufacturing overhead

Definition of Prime Costs

Prime costs are the combination of the two direct product costs:

 Direct materials costs

 Direct labor costs

Definition of Conversion Costs

Conversion costs are the two categories of manufacturing costs that are needed to convert the
direct materials into products:

 Direct labor costs

 Manufacturing overhead costs

As you can see, the direct labor costs are considered to be both a prime cost and a conversion
cost.

Formula:
Prime costs and conversion costs can be calculated using the following equations:

Prime costs = direct materials cost + direct labor cost

Conversion costs = direct labor cost + manufacturing overhead costs

Example

Elite Furniture is a small furniture manufacturer. In the first week of December, they worked
exclusively on an order to build 5 conference tables. Costs incurred are as follows:

Opening stock of timber $50

Timber purchased during the week 2,000

Closing stock of timber 250

Glass purchased for table tops 500

Labor hours worked 100

Wages per hour 40

Design engineer salary allocated to the job 2,500

Indirect materials and utilities cost allocated to the job 3,000

Solution

Timber consumed = opening stock + purchases − closing stock = $50 + $2,000 − $250 = $1,800

Other direct materials used (glass) = $500

Total direct materials cost = $1,800 + $500 = $2,300

Direct manufacturing labor cost = hours worked × hourly wage = 100 * $40 = $4,000

Manufacturing overhead costs = design engineer salary + indirect materials and utilities = $2,500
+ $3,000 = $5,500

Prime costs = direct materials cost + direct labor cost = $2,300 + $4,000 = $6,300

Conversion costs = direct labor cost + manufacturing overhead costs = $4,000 + $5,500 = $9,500

Definition of Manufacturing Costs

Manufacturing costs are the costs of materials plus the costs to convert the materials into
products. All manufacturing costs must be assigned to the units produced in order for a
company's external financial statements to comply with U.S. GAAP.

The resulting unit costs are used for inventory valuation and for the calculation of the cost of
goods sold.
Example of Manufacturing Costs

Manufacturing costs are typically divided into three categories:

 Direct materials, which is the cost of the materials that are traceable to the product, such
as the aluminum in beverage cans

 Direct labor, which are the wages and fringe benefits earned by the individuals who are
physically involved in converting raw materials into a finished product

 Manufacturing overhead, which includes all of the other costs incurred in the
manufacturing activities. These indirect costs include repairs and
maintenance, depreciation of the manufacturing equipment, utilities, salaries of
manufacturing supervisors, etc.