The Cost of Goods Manufactured (COGM) formula is used to calculate the total expenses of manufacturing a product.
Explanation:
The production of goods involves expenses, which need to be calculated in order to understand a company’s income and residue. The COGM formula examines the expenses related to producing finished goods, in terms of labor, materials, and other variables. In other words, the cost of goods manufactured can be defined as a calculation of the total costs of production during a reported period of time. To report a COGM statement, the costs of manufacturing should be divided into several categories.
The components of the total manufacturing costs include the direct materials costs, the direct labor costs, and the assigned overhead costs during the accounting period. To calculate the COGM for the year, the cost of the direct materials, direct labor, overhead, and the beginning WIN (work-in-progress) inventory are added together, from which the ending WIN amount is then deducted.
COGM accounting is different from the calculation of the cost of goods sold because manufactured products may not be actually purchased for some time. Since goods can be manufactured beforehand and sold later, during the manufacturing process, the costs of goods sold will be zero, and afterwards, when the goods are sold, the cost of goods manufactured will be zero. To calculate the cost of goods sold, the beginning inventory should be added to the COGM, and the ending inventory should be deducted from this sum.
Consequently, an example taken from the Corporate Finance Institute website of the cost of goods manufactured equation used to count the cost of goods sold will appear as follows: