What is Cost of Goods Manufactured Formula?
The Cost of Goods Manufactured (COGM) measures the manufacturing cost of creating goods produced over a specific duration. It is the total cost of manufacturing products and transforming them into finished goods for retail sale.
Significance of Cost of Goods Manufactured in E-commerce Business
COGM formula holds utmost importance in business to have a general idea about the production costs being low or too high. Know significance of COGM formula in e-commerce business below:
- It determines the exact cost of products manufactured during a particular time.
- The cost of goods manufactured formula informs companies about whether production costs are high or low compared to sales.
- COGM formula calculates the total inventory value of a company during the period and is ready for sale.
Applications of the Cost of Goods Manufactured Formula
With the cost of goods manufactured, a business can ascertain the element of the cost involved in turning inventory into a sale. Further applications of the COGM formula include:
- Determining results of production costs that companies can use to analyze and increase the profit margin
- Evaluating the production cost of the past to forecast the production cost of the future
Cost of Goods Manufactured Formula
To compute the cost of goods manufactured, you need to factor in the total cost involved in manufacturing, along with beginning and ending work in process inventory. A breakdown of the cost of goods manufactured formula is given below:
Definition of Each Element Used in the Formula
Total Manufacturing Cost: It is the sum of direct labor cost, direct material cost, and factory overhead.
Beginning Work-in-Process Inventory: It determines the products’ value in production but has not yet been completed at the termination of an accounting period.
Ending Work-in-Process Inventory: It is inventory that is partially completed but needs additional processing before it can be categorized as finished goods inventory.
How to Apply the Cost of Goods Manufactured Formula to Calculate a Business’ Cost of Goods Manufactured?
Suppose a cricket equipment manufacturer has made A$120,000 of finished goods inventory at the start of the accounting period. It spent A$60,000 on game equipment, A$85,000 on employee salaries, and A$50,000 on rent. The ending work-in-process inventory is found to be A$65,000.
COGM = A$120,000 + (A$60,000 + A$85,000 + A$50,000) – A$65,000
What Can You Infer From Costs of Goods Manufactured Formula Result?
If COGM helps companies to understand if the production cost involved in manufacturing a product is justifiable. It is instrumental in determining sales revenue. If the sales revenue is low, the company needs to decrease its manufacturing costs to boost its gross margin percentage.