The Cost of Goods Manufactured (COGM) is a company's total cost of producing goods over a defined accounting period, encompassing materials, labour, and overhead.

If you're one of the many businesses that struggle to pinpoint their production expenses, you're risking financial missteps. Hidden costs could be silently eroding your profits, turning seemingly healthy margins into losses.

Without a clear grasp of these figures, pricing becomes a guessing game, and nobody wants that.

Our comprehensive guide is the solution you need. We break down COGM with clear formulas, practical examples, and actionable tips to help you calculate and manage costs accurately. With a complete picture of your production costs, you can improve operations and make informed decisions to increase margins and profitability.

Here's a quick look at what's covered:

• What Is Cost of Goods Manufactured (COGM)?
• Why Is COGM Important for Warehouse & Manufacturing Teams?
• The COGM Formula & Its Components
• Step-by-Step: How to Calculate COGM
• COGM vs. COGS: What’s the Difference?
• The Role of COGM in Warehouse Efficiency & Profitability
• Common Challenges in COGM Calculation
• How StoreFeeder Helps Streamline COGM Tracking & Reporting
• Tips to Optimise COGM Tracking

What Is Cost of Goods Manufactured (COGM)?

COGM is the total manufacturing cost for all completed goods in an accounting period. It includes the raw materials used in production, the wages paid to the workers directly involved in production, and the indirect costs of running your factory.

COGM is a critical metric for strategic decision-making. It helps businesses:

• Control costs
• Optimise stock management
• Set accurate pricing 

Note: COGM is not the same as Cost of Goods Sold (COGS). 

• COGM: Tracks the manufacturing costs of finished goods over a period. These goods might be sold later or remain in inventory.
• COGS: Tracks the cost of goods that were sold over a period, regardless of when they were produced.

Why Is COGM Important for Warehouse & Manufacturing Teams?

COGM provides warehouse and manufacturing teams with valuable insights into factory costs and warehouse efficiencies, which help improve profitability.

Here are the key benefits COGM brings to these operations:

• Accurate inventory valuation: COGM helps you value your finished goods inventory correctly. Knowing the true cost of items in stock ensures your financial statements are accurate and your assets are properly represented.
• Better cost control: By breaking down production costs, COGM provides better visibility into wasteful processes, as well as rising material or labour costs. It allows your teams to take cost-saving actions directly on the factory floor.
• Optimised production and inventory turnover: COGM helps you to balance production levels and demand so you can avoid excess stock while having enough products to meet customer orders. 
• Informed pricing strategies: You can't price your products correctly without a comprehensive understanding of your manufacturing costs. COGM provides the vital information you need to set competitive prices that cover your production costs, leaving you a satisfactory margin.

The COGM Formula and Its Components

Let's look at how to calculate Cost of Goods Manufactured.

The core COGM formula is as follows:

COGM = Beginning Work-in-Process (WIP) Inventory + Total Manufacturing Costs − Ending Work-in-Process (WIP) Inventory

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These are its components:

1. Beginning Work-in-Process (WIP) Inventory: The costs of all the goods that were partially completed at the start of your accounting period (e.g., the first day of the month or quarter). 
2. Total Manufacturing Costs: The sum of all new expenses incurred during production. It's broken down into three main categories:
   
   • Direct materials: The raw materials that were used directly in your finished product. For example, the cost of wood, fabric, and nails used in furniture production. Tracking this involves monitoring raw material inventory receipts and actual usage.
   • Direct labour costs: These direct costs are the wages paid to employees who are physically involved in the manufacturing process. Examples include assembly, machine operation, and welding, or hands-on roles that contribute to converting raw materials into finished goods. 
   • Manufacturing overhead costs: These are all the indirect expenses of running your factory and supporting production. They are essential to the process but aren't a direct production expense.
     Examples include factory rent, utility bills for the plant, and depreciation of manufacturing equipment. This overhead can also include indirect labour (like factory supervisors or maintenance staff) and indirect materials (like lubricants for machines or cleaning supplies).
3. Ending Work-in-Process (WIP) Inventory: These are the costs of all the goods that are partially completed at the end of your accounting period.

Step-by-Step: How to Calculate COGM

Follow these four straightforward steps to calculate your production costs.

1. Select your accounting period:
   
   • Determine the timeframe you want to analyse. This is usually a month, a quarter, or a year. Consistency is key for accurate comparisons.
   • Get WIP inventory data by identifying the total value of your Beginning Work-in-Process (WIP) Inventory for the start of your accounting period, and the total value of your Ending Work-in-Process (WIP) Inventory for the end of that same period.
     This requires a physical count or system-generated report at the beginning and end of the period.
2. Calculate total manufacturing costs, which encompass:
   
   • Direct material costs: Calculate the cost of all raw materials directly used in production during the period. (Beginning Raw Materials Inventory + Purchases - Ending Raw Materials Inventory = Direct Materials Used).
   • Direct labour costs: Add the total wages paid to all direct production employees for the period.
   • Manufacturing overhead: Add up all indirect manufacturing costs incurred during the period.
3. Plug Values into the COGM Formula:
   
   • Once you have all your figures, insert them into the COGM formula:
     COGM = Beginning WIP Inventory + Total Manufacturing Costs − Ending WIP Inventory.

Cost of Goods Manufactured Example

Here's an example. Let's assume the following monthly figures:

• Beginning WIP inventory: £10,000
• Direct Materials used: £100,000
• Direct Labour: £50,000
• Manufacturing overhead: £60,000
• Ending WIP inventory: £30,000

Calculation:

First, calculate Total Manufacturing Costs: £100,000 (Direct Materials) + £50,000 (Direct Labour) + £60,000 (Overhead) = £210,000.

Now, input figures into the COGM formula: COGM = £10,000 (Beginning WIP) + £210,000 (Total Manufacturing Costs) – £30,000 (Ending WIP). COGM = £190,000.

This means it cost you £190,000 to produce all the goods that were completed and ready for sale in that month.

COGM vs. COGS: What’s the Difference?

Cost of Goods Manufactured (COGM) is closely related to Cost of Goods Sold (COGS), although they are two distinct calculations. Understanding the differences and their relationship is crucial to managing your margins astutely. 

COGM: The Cost of Making

• As we've discussed, COGM is the total cost of making all the goods that were manufactured during a specific period. It represents the costs of getting products ready for sale.

COGS: The Cost of Selling

• COGS is the total cost of the goods that were actually sold during the period. It relates to the revenue generated from sales.

And the relationship between them? COGM feeds directly into the COGS calculation. Once goods are manufactured, they move into your finished goods inventory. COGS draws from this inventory.

The Cost of Goods Sold (COGS) formula:

• COGS = Beginning Finished Goods Inventory + COGM − Ending Finished Goods Inventory

Since COGM is an input for calculating your COGS, an accurate COGM is vital for accurately determining the company’s gross profit (Revenue - COGS).

If your COGM is wrong, your COGS and gross profit will be distorted, leading to incorrect financial accounts and potentially bad business decisions.  

The Role of COGM in Warehouse Efficiency & Profitability

COGM is a direct driver of operational efficiency and overall business profitability. Managing it effectively delivers several impactful gains.

Leaner inventory management

Accurate COGM means you know your true inventory costs. Armed with this knowledge, you can minimise storage, spoilage, or obsolescence costs. You're also better placed to improve production runs and reduce excess WIP.

Eliminating excessive costs and inefficiencies

By drilling into the components of COGM (materials, labour, overhead costs), you can identify bottlenecks and problematic expenses.

Is your raw material waste too high? Is a particular production line consuming excessive labour or utilities? COGM helps you pinpoint these inefficiencies and implement remedial actions.

Better demand forecasting and resource allocation

Understanding your COGM allows you to make more informed decisions about future production. You can better plan resource allocation (labor shifts, material purchases) based on sales forecasts. This ensures you have the right products ready at the right cost.

Improved cash flow

When COGM insights improve production processes, less capital is tied up in WIP and stock. This enhances cash flow, which is always a win. You've created more money for other critical activities, investments, or new business opportunities.

Common Challenges in COGM Calculation

The COGM calculation is relatively straightforward, but obtaining accurate data for the formula often proves difficult. Many companies produce flawed results that harm the business more than they help.

Let's run through the most frequent obstacles businesses face when calculating COGM and highlight how automation and integrated systems can help.

Allocating overhead costs accurately

We've seen that manufacturing overhead includes a wide range of indirect costs (factory rent, utilities, depreciation, and sometimes even indirect labour). Assigning these overhead costs fairly and accurately to specific items or production runs can be tricky. This is especially true in complex multi-product environments.

The wrong allocation method skews individual product costs, making products appear more or less profitable than they truly are. Ultimately, your margins and/or sales suffer.

Poor integration between systems

Many businesses use separate software for production planning, inventory management, accounting, and sales. When these systems don't "talk" to each other, data has to be transferred manually. This inevitably causes delays, inconsistencies, and errors.

Without real-time, integrated data, it's nearly impossible to react effectively to changes in direct material and other costs and market conditions.

Manual data entry errors and inconsistent inventory tracking

Relying on manual spreadsheets or different systems for tracking raw materials, WIP, and finished goods is not ideal in today’s competitive tech-driven landscape. Manual mistakes, miscounts, and delayed updates can distort inventory, producing a dangerously misleading COGM.

How automation and integrated platforms reduce these challenges

The good news is that modern, integrated software solutions can effectively address these challenges. These platforms allow you to automate data capture and streamline workflows. They reduce manual errors, ensure consistent data, and enable accurate cost allocation. The bottom line: your COGM is a precise, actionable insight, rather than a frustrating and unreliable calculation.  

Tips to Optimise COGM Tracking

Use these actionable tips to ensure your COGM calculations are accurate and you have the manufacturing intel to boost profitability:

• Implement automated inventory tracking: Invest in a robust system that provides real-time visibility into your direct materials, WIP, and stock levels. Automation reduces discrepancies and makes information available at the push of a button.
• Review and reconcile WIP and finished goods inventory regularly: Don't wait until the end of the accounting period. Conduct periodic (e.g., weekly or bi-weekly) physical counts or system checks of your WIP and finished goods. The goal is to catch discrepancies early and keep your COGM calculations on track.
• Use integrated software for cost allocation:  To account for every COGM cost input accurately, invest in an integrated software system. An integrated platform allows you to precisely allocate both direct materials and labour as well as indirect manufacturing overhead to specific products or batches. 
• Schedule periodic audits to ensure data accuracy: Even with automation, regular audits are recommended. Periodically review your input data, calculations, and the processes behind your COGM figures. Besides spotting systemic errors, it also builds confidence in your financial reporting.

FAQs

Is the cost of goods manufactured the same as manufacturing cost?

Not exactly. Manufacturing cost is a broader term for your current production costs, while COGM represents the total cost of goods completed during a specific period.

What are the benefits of COGM in manufacturing?

COGM gives manufacturers a clear view of total production costs. This helps to identify inefficiencies, control expenses, and improve pricing strategies. Greater cost transparency and insights support more informed decision-making throughout the production process.

What are the benefits of COGM in warehouse management?

COGM helps warehouse managers track production costs more accurately, manage inventory levels, and reduce waste. It can facilitate smarter storage and better matching of purchasing and manufacturing.

Conclusion

Successful businesses understand the importance of optimising their cost of goods manufactured (COGM). It's an essential tool for managing costs, prices, and efficiency, including optimising warehouse space and operations.

By using integrated automation solutions, you can turn COGM tracking into a seamless, real-time process. This shift minimises mistakes, provides better data, and boosts productivity tremendously.