What Is Cost of Goods Manufactured (COGM)?
Also known as: COGM, cost of production, cost of goods manufactured schedule
Definition
Cost of goods manufactured is the total cost of goods completed during a period: direct materials used, direct labor and applied overhead, plus beginning work in process minus ending work in process. It moves into finished goods and then to cost of goods sold.
Cost of Goods Manufactured (COGM) Explained
COGM is built in a schedule. Start with raw materials used (beginning raw material inventory plus purchases minus ending raw material). Add direct labor and manufacturing overhead to get total manufacturing cost for the period. Add beginning WIP and subtract ending WIP, and the result is the cost of goods manufactured.
It is different from cost of goods sold. COGM covers what was completed in the period, whether sold or not. COGS is the cost of what was sold, calculated as beginning finished goods plus COGM minus ending finished goods. A plant building inventory ahead of a season will have COGM well above COGS.
ERPs do not always produce a COGM report as a single statement, but the data is held in ledger accounts: raw material, WIP, finished goods, labor and overhead absorbed, and production variances. NetSuite and Business Central expose it through work order completion postings and financial reports. SAP gets there through the production order settlement to inventory, with the WIP calculation and variance determination at period end. SyteLine and Infor LN feed the same accounts through job and production order transactions to the general ledger.
Reconciling COGM between the cost accounting subledger and the general ledger is a standard part of the monthly close for manufacturers.
Why It Matters
- It is the bridge between production activity and the income statement for a manufacturer.
- Comparing COGM with COGS shows whether inventory is building or shrinking.
- It makes under- or over-absorbed overhead and variances visible before they are buried in COGS.
- Lenders, auditors and tax authorities often ask for the schedule that supports inventory values.
In Practice
Raw materials used are 500,000, direct labor 200,000 and applied overhead 150,000, giving total manufacturing cost of 850,000. Beginning WIP is 60,000 and ending WIP is 90,000. COGM = 850,000 + 60,000 - 90,000 = 820,000. If beginning finished goods are 100,000 and ending are 130,000, then COGS = 100,000 + 820,000 - 130,000 = 790,000.
Frequently Asked Questions
What is the COGM formula?
COGM = direct materials used + direct labor + manufacturing overhead + beginning WIP - ending WIP.
What is the difference between COGM and COGS?
COGM is the cost of goods completed in a period. COGS is the cost of goods sold, which also depends on the change in finished goods inventory.
Does a trading company need COGM?
No. COGM applies to manufacturers. Traders and distributors use purchases and inventory changes to calculate COGS directly.
Related Terms
WIP (Work in Process)
WIP (Work in Process) is inventory that has been released to production and has begun conversion but is not yet a finished good. It includes partially machined parts, subassemblies, and material sitting in queue between operations.
Standard Cost
Standard cost is a predetermined per-unit cost for material, labor, and overhead, set in advance and used to value inventory and transactions. Differences between standard and actual are captured as variances that isolate where cost deviated.
Overhead Absorption (Applied Overhead)
Overhead absorption is the process of charging indirect manufacturing costs, such as factory rent, utilities and supervision, to products or jobs using a predetermined rate based on labor hours, machine hours or another base.
Period Close
Period close is the recurring process of finalizing a fiscal period: completing transactions, reconciling subledgers to the general ledger, posting accruals and adjustments, running costing, then locking the period so reported results cannot change.
General Ledger
The general ledger is the central accounting record of a business, where every financial transaction posts as balanced debits and credits against accounts in the chart of accounts, producing the trial balance behind all financial statements.
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