The cost of goods manufactured is the monetary amount that indicates the total expenses incurred by an enterprise during the production of goods that can be sold in the market.
In order to make a profit, a business needs to sell goods in the market for the amount of money that is larger than the expenses incurred during the manufacturing. The cost of goods manufactured shows how much money the company had to spend to go through the process of production to complete the total volume of its inventory of finished products that it can sell. This figure can be calculated by finding a sum of all the costs involved in the process. These expenses include the cost of direct materials, direct labor, and other expenses associated with running a factory, such as paying rent and maintaining the facilities. Hence, accountants calculate this figure with the help of the special formula to show the total expenses incurred while creating finished goods inventory during the accounting period.
It is noteworthy that the cost of goods manufactured is different from the cost of goods sold. The latter term refers to the cost of products that have been sold to third parties. The cost of goods sold goes to the income statement and is used to compute the net income of a company. The cost of goods manufactured, on the other hand, also includes the cost of the items that remain in stock. These products are still waiting to be sold, and thus, have not yet been turned into revenues. These figures can be used to analyze the cost flow, which is essential to increase the efficiency of manufacturing operations. Optimizing costs allows lowering retail prices, providing a source of substantial competitive advantage