Cost of goods manufactured (COGM) is crucial for informed decision-making on pricing, inventory management, and profitability. It encompasses the total cost of producing goods within a specific timeframe. This includes direct material, labor, and overhead costs. In this blog post, we will explore COGM calculation, analyzing COGM data, and the practical application of Viindoo software for cost estimation and analysis.
Introduction to Cost of Goods Manufactured
The cost of goods manufactured is a key component of a company's financial statements. It represents the expenses incurred in the production of goods that are ready for sale. This cost is then transferred to the cost of goods sold when the products are sold to customers. Therefore, understanding the COGM is essential for determining the profitability of a business.
To calculate the COGM, we need to consider three main components: direct materials, labor costs, and overhead costs. Let's take a closer look at each of these elements.
Introduction to Cost of Goods Manufactured
Direct Materials and Labor Costs
Direct material costs , also known as raw materials, are basic components that have not undergone processing or manufacturing. These are primary materials used to produce other products or components.
Labor costs are the wages paid to employees who work directly on the production of goods.
Let's look at an example to better understand this concept: ABC Manufacturing Company has a beginning inventory of $50,000 in raw materials and work-in-progress. During the period, they purchased $100,000 worth of raw materials and paid $80,000 in direct labor costs. At the end of the period, their ending inventory was valued at $30,000. Therefore, their direct materials and labor costs in the COGM would be:
Direct Materials = $50,000 + $100,000 - $30,000 = $120,000
Labor Costs = $80,000
Overhead costs
Overhead costs are the aggregation of indirect costs incurred during the production process that cannot be easily allocated or assigned to specific products within the production process. Examples of overhead costs include: factory rental costs, electricity fee and water fee; maintenance and repair costs; salary of production management staff...
Calculating Total Cost of Goods Manufactured
Now that we have determined the direct materials and labor costs, as well as the overhead costs, we can calculate the total manufacturing costs. This is the sum of all the expenses incurred in the production process and includes direct materials, direct labor, and overhead costs. The formula for calculating total manufacturing costs is as follows:
Total Manufacturing Costs = Direct Materials and Labor Costs + Overhead Costs
Cost of goods manufactured: Total Manufacturing Costs
Cost of Goods Manufactured vs. Cost of Goods Sold
Cost of goods manufactured and Cost of goods sold (COGS) are often confused, but they represent two different concepts. As mentioned earlier, the COGM refers to the total cost incurred in the production of goods during a specific period. On the other hand, the COGS represents the cost of goods that have been sold to customers during the same period. The main difference between the two is that the COGM includes all the costs incurred in the production process, while the COGS only includes the costs of goods that have been sold.
To better understand this concept, let's continue with our example from above. ABC Manufacturing Company has a COGM of $150,000 for the period. However, they only sold $120,000 worth of goods during the same period. Therefore, their COGS would be $120,000, and the remaining $30,000 would be added to their ending inventory.
Using Viindoo Software for Calculating, Interpreting, and Analyzing Cost of Goods Manufactured
Using Viindoo software for calculating, interpreting, and analyzing the cost of goods manufactured is an efficient and effective way to manage production costs. Viindoo provides comprehensive tools and features that streamline the process and provide valuable insights into the cost structure.
Calculating Cost of Goods Manufactured
Firstly, Viindoo enables businesses to input and track direct material costs, labor costs, and overhead costs related to the manufacturing process. By organizing and categorizing these costs, the software automatically calculates the COGM accurately and in a timely manner.
Direct material costs
are compiled from
Manufacturing Orders through Bill of Material information.
Cost of goods manufactured: direct material costs
Labor costs, Overhead costs for the period are allocated to Manufacturing Orders according to the criteria chosen by the accountant. The criteria include: Equal, by quantity, by volume, by current cost, by weight.
Cost of goods manufactured: allocate labor costs and overhead costs
Interpreting and Analyzing Cost of Goods Manufactured Data
Once we have calculated the COGM, it is essential to analyze the data to gain insights into the company's financial performance. One way to do this is by comparing the COGM to previous periods to identify any trends or changes. A significant increase in the COGM could indicate higher production cost , while a decrease could suggest improved efficiency.
Production Cost Report in one period
Production Cost Report compares multiple periods
Discover Viindoo Manufacturing Software
The All-in-one Software for Manufacturers helps calculate production costs of goods and generates reports automatically, accurately, and immediately.
Viindoo software provides comprehensive tools and features to support the calculation, reporting, and analysis COGM. It allows businesses to input or automatically record and track direct material costs, labor costs, and overhead costs related to the production process. The software accurately and timely calculates COGM.
Viindoo software allows businesses to organize and categorize COGM, including direct material costs, labor costs, and overhead costs. It automatically calculates production costs through data input or automatic recording. By using criteria such as equal distribution, quantity-based, volume-based, current cost-based, or weight-based, the software allocates labor costs and overhead costs to Manufacturing Orders.
Viindoo software provides the ability to generate production cost reports for a specific period. Additionally, it allows for the comparison of production costs across multiple periods to analyze trends and changes in the company's financial performance.
Viindoo Manufacturing Software helps streamline the process of calculating, reporting, and analyzing cost of goods manufactured. It accurately and timely calculates costs, enhancing the efficiency of production cost management. By providing detailed reports and data analysis, it helps businesses gain a better understanding of financial performance and make informed decisions regarding pricing, inventory management, and profitability.
Viindoo software is designed to serve manufacturing businesses of all scales, including large-scale manufacturing and those with complex product varieties. The software can meet the cost management needs of diverse industries such as industrial manufacturing, mechanical processing, electronics, food and beverages, pharmaceuticals, and many others. It offers flexible and customizable features to meet the specific requirements of different types of manufacturing and businesses.
Conclusion
In conclusion, a solid understanding cost of goods manufactured is essential for making informed decisions regarding pricing, inventory management, and overall profitability. However, calculating production costs can be challenging, especially when confronted with high production volumes and complex product types. Moreover, the availability of timely COGM reports may be limited for business owners. Viindoo Manufacturing Software simplifies the COGM calculation process and offers instant, detailed reports. This empowers business owners to make faster and more accurate decisions, ultimately enhancing their operational efficiency and financial performance.
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