Definition: The cost of goods manufactured (COGM), also called cost of goods completed, calculates the total value of inventory that was produced during the period and is ready for sale. In other words, this is the total amount of expenses incurred to turn work in process inventory into finished goods.
What Does Cost of Goods Manufactured Mean?
The cost of goods manufactured equation is calculated by adding the total manufacturing costs; including all direct materials, direct labor, and factory overhead; to the beginning work in process inventory and subtracting the ending goods in process inventory. This formula will leave you with only the cost of goods that were completed during the period.
Another way to look at this calculation is to think of it like the cost of goods completed equals the amount of inventory that was transferred from the goods in process account into the finished goods account by the end of the period.
The cost of goods manufactured total is also a component of the cost of goods sold calculation.
Let’s take a look at an example.
Steelcase is a furniture manufacturer with a factory and offices in the Midwest. Let’s assume that they had $100,000 of finished goods inventory at the beginning of the period. Throughout the period, it spent $50,000 on materials for chairs and tables, $125,000 on worker’s salaries, and $65,000 on rent and utilities.
After using the equivalent units of production calculation, the Steelcase managers were able to determine that the ending goods in process inventory was $75,000.
Thus, the total cost of goods manufactured for the period would be $265,000 ($100,000 + $50,000 + $125,000 + $65,000 – $75,000). This means that Steelcase was able to finish $265,000 worth of furniture during the period and move this merchandise from the work in process account to the finished goods account by the end of the period.