Everything You Need To Know About COGM vs COGS

Knowing the cost of goods manufactured and the cost of goods sold is crucial for maintaining a balance over your production costs. COGM or cost of goods manufactured refer to goods that were manufactured by a company and were involved in a plethora of processes in order to produce the finished product and deliver it to the consumers.

On the other hand, GOGS refers to the direct costs of manufacturing the products that a company sells. This figure includes the expenses linked to the materials and direct labor utilized in the production process. However, it doesn’t include indirect expenses such as distribution costs. In this article, we will take a deep dive into COGM vs COGS!

What is The Cost of Goods Manufactured (COGM)?

Monitoring COGM holds significance as it allows manufacturers to measure the costs associated with manufacturing goods. Furthermore, it assesses the profitability of their operations and calculates the key performance indicator for cost of goods sold (COGS).

COGM vs TMC

In contrast to the closely related key performance indicator known as the total manufacturing cost (TMC), COGM omits the expenses of goods that remained incomplete at the conclusion of a given time frame, which constitute the ending work in process (WIP) inventory.

The cost of goods manufactured (COGM) is a financial measure that illustrates the complete expenditures incurred by a manufacturing enterprise during the creation of finalized products. Moreover, COGM compiles all the costs linked to the production of finished items, including both direct elements (such as raw materials and labor) and indirect outlays.

How To Calculate COGM?

The process of calculating the cost of goods manufactured involves adding both direct and indirect costs associated with the manufacturing process. This means that calculating COGM entails knowing the total manufacturing cost (TMC) and the WIP inventory values for the beginning and end of the accounting timeframe.

COGM Formula

COGM = (Beginning work in process inventory + Total manufacturing cost) – Ending work in process inventory

So let’s dive into the basics of each part of the equation to help you get a better idea of how to practically use this formula!

Total Manufacturing Cost (TMC)

The TMC includes the total cost of production of goods manufactured and includes three categories:

• Cost of Direct Materials: This category includes all the physical materials and components that will be of use in the manufacturing process of the finished good.
• Direct Labor Costs: Costs such as salaries or holidays are part of the direct labor costs.
• Manufacturing Overhead: Manufacturing overhead or indirect manufacturing costs include those costs that aren’t directly related to the production of the finished product but are still required in the manufacturing process.

Total manufacturing cost = direct materials + direct labor + manufacturing overhead

Work In Process Inventory

The second component of the COGM formula addresses the work in process or WIP Inventory, which is listed as a current asset on the company’s balance sheet. WIP is typically calculated at the end of accounting periods. The initial WIP denotes the total worth of unfinished products carried forward from the preceding accounting period. Conversely, the concluding WIP includes the remaining manufacturing expenses, accounting for the value of completed goods within the timeframe.

Many manufacturers strive to minimize the concluding WIP. However, this action releases capital, alleviates the tax burden, and notably simplifies the accounting process. When WIP reaches zero, Total Manufacturing Costs (TCM) equate to Cost of Goods Manufactured (COGM). The manual determination of the exact WIP value is intricate due to factors like overhead percentages and taxes, necessitating calculations for each incomplete work order.

What is The Cost of Goods Sold (COGS)?

COGS refers to the direct costs of manufacturing goods that are going to be sold by a company. The amount of COGS includes the cost of materials and labor that were used directly for the production of goods. On the other hand, indirect expenses are excluded from this category of goods.

How To Calculate COGS?

COGS Formula

* P = purchases during that period

Different Accounting Methods for COGS

The value of the cost of goods sold depends on the inventory costing approach that a company has embraced. There are three costing methodologies for companies to use when documenting the extent of inventory sold in a given period:

• FIFO: In the first in first out method the earliest goods to be purchased or produced are sold first. As there is price differentiation over time, a company that uses the FIFO sells the least expensive products first which is related to a lower COGS than the COGS recorded in a LIFO method. Therefore, with the FIFO method, a company may increase its net income over time,
• LIFO: In this case, the latest goods are sold first. During periods of pricing fluctuations, products with higher costs are sold first causing a higher COGS amount. As a result, the net income of the business may decrease.
• Average Costing Method: Businesses that follow this method, calculate the average price of all the goods in stock to value the goods sold.

Differences Between COGM vs COGS

There are plenty of differences between COGM vs COGS. First of all, these two methods are calculated differently and have different purposes and usages. Specifically, COGM is mainly used to calculate the overall cost of producing a good or service before it’s sold while COGMs only calculate the cost of goods that have been sold or received by the customers. Other than that, COGM is ideal for focusing on internal manufacturing processes and supply chains rather than internal manufacturing expenses where COGS is much more beneficial.