Cost of Goods Sold and Manufactured
The cost of goods manufactured (COGM) and cost of goods sold (COGS) is calculated using the various cost classifications.
• The sum of all costs that directly relate to producing goods that were sold during the period is referred to as the cost of goods sold (COGS). The direct costs of the unit's materials and labour as well as an allocation of a portion of manufacturing overhead costs are included in the cost of goods sold for each unit sold.
• The total costs directly attributable to producing items that were brought to completion in the manufacturing process during the period—whether manufacturing on them began before the beginning of the current period or during the current period—are referred to as the cost of goods manufactured (COGM). The direct costs of the unit's materials and labour, as well as a portion of the manufacturing overhead costs, are included in the cost of goods manufactured for each completed unit.
Sales, marketing, and distribution costs are not included in either the cost of goods sold or the cost of goods manufactured because they are period costs.
Despite having some similarities, COGS and COGM are very different in one important way.
• COGS is an expense that is reported externally and appears on the income statement. It is the price that was paid to make the units that people bought during that time.
• COGM is an internal number that is not included in the income statement or the balance sheet. The cost of producing the units that were completed during the period is represented by COGM.
However, COGM is used to determine a company's cost of goods sold when it produces its own inventory.
The process of calculating both numbers is explained in greater detail below.
For any business, figuring out how much it will cost to make something is a very important step. The calculated cost must accurately reflect the entire production cost. The company may charge an incorrect price for the product if it does not accurately calculate the cost of production. If the price is too high, the volume of sales will be low, and if the price is too low, profits will be low.
When the items are finished, the balance sheet shows the calculated production cost per unit as the value of each unit of finished goods inventory. The cost of each item sold is added to the income statement as the cost of goods sold as inventory items are sold.
The information that accountants provide to management regarding the company's production costs is crucial because it is necessary to accurately determine the cost of production. In addition, it is advantageous to provide the data frequently and quickly so that management can make any necessary adjustments, such as price adjustments, as soon as possible.
Calculating the Cost of Goods Sold The cost of producing or purchasing the units that were sold during the period is referred to as the Cost of Goods Sold.
Since it is probably the largest individual expense line item on the income statement, accurate cost of goods sold calculation is critical.
The following formula is used to determine the cost of goods sold:
Because it assumes that all units in the finished goods inventory at the beginning of the period were either sold during the period or were still in the finished goods inventory at the end of the period, which is not always the case, the formula above simplifies the actual situation. In fact, some units might get lost, stolen, or damaged. However, the formula above suffices for the CMA Part 1 Exam.
Calculating the Cost of Goods Manufactured The cost of the units that were completed and removed from the work-in-progress inventory during the specified period is referred to as the Cost of Goods Manufactured. The cost of work done on units that were not finished during the period is not included in COGM.
The following formula is used to determine the cost of producing goods:
A manufacturing company will include the COGM in its cost of goods sold (COGS) calculation.
Because it assumes that all items of work-in-process inventory were either completed during the period or are in ending work-in-process inventory, the COGM calculation, like the COGS calculation, simplifies reality. In point of fact, some of the inventory of work-in-progress may have been misplaced, damaged, or not used at all during the period, so some of the raw materials used in production or items worked on during the period will not be included in the ending inventory. However, the formula above suffices for the CMA Part 1 exam.