Ever stared at your production costs, wondering how all the numbers fit together? Understanding your true manufacturing expenses is crucial for pricing, budgeting, and decision-making—but it can seem overwhelming at first glance.
A cost of goods manufactured (COGM) statement pulls back the curtain, giving you a clear picture of your company’s production costs. This article will show you, step by step, how to prepare a COGM statement, offering practical advice and helpful tips to streamline the process.
How to Prepare a Cost of Goods Manufactured Statement
The Cost of Goods Manufactured (COGM) statement is a key financial document for manufacturers. It tracks the total production costs incurred to turn raw materials into finished goods within a given accounting period. Creating this statement helps you understand your manufacturing efficiency and the true cost of producing your products—a vital step for setting prices, monitoring profitability, and making sound business decisions.
Let’s walk step by step through preparing a COGM statement, discuss its components, benefits, challenges, and share some expert tips and insights.
What Is a Cost of Goods Manufactured Statement?
A COGM statement details all the direct and indirect manufacturing costs incurred during a period. It does not include costs related to selling, general, or administrative expenses. Instead, it focuses strictly on costs required to produce products—providing clarity on manufacturing performance.
Main purpose:
The statement helps you track production costs, value inventory correctly, improve cost control, and facilitate decision-making.
Components of the COGM Statement
A typical COGM statement includes the following components:
- Direct Materials: Raw materials that become part of the finished product.
- Direct Labor: Wages for employees directly involved in production.
- Manufacturing Overhead: Indirect costs related to production (factory rent, utilities, machine depreciation, etc.).
- Work in Process (WIP) Inventory: Inventory that is in production but not yet finished at the start and end of the period.
Step-by-Step: Preparing a Cost of Goods Manufactured Statement
Understanding the flow is crucial; you’re essentially tracking how materials and costs move through the production process. Here are the steps to prepare the statement:
1. Calculate Total Direct Materials Used
Start by determining how much raw material was actually consumed in production. This involves:
- Beginning Raw Materials Inventory
- Plus: Purchases of Raw Materials
- Less: Ending Raw Materials Inventory
Formula:
Direct Materials Used = Beginning Raw Materials + Purchases – Ending Raw Materials
2. Add Direct Labor Costs
Sum up all wages and related expenses paid to workers who are directly manufacturing the products.
- These are only for production staff, not administrative or sales employees.
3. Include Manufacturing Overhead
Add all indirect production costs. Typical overhead costs include:
- Factory utilities
- Equipment maintenance
- Supervisor salaries
- Factory rent
- Depreciation on machinery
Include only those overheads linked to the manufacturing facility.
4. Determine Total Manufacturing Costs Incurred
Add up:
– Direct Materials Used
– Direct Labor
– Manufacturing Overhead
Formula:
Total Manufacturing Costs = Direct Materials Used + Direct Labor + Manufacturing Overhead
5. Adjust for Work in Process Inventory
You need to factor in inventory that was in production but unfinished. Here’s how:
- Add: Beginning Work in Process (WIP) Inventory (leftover from last period)
- Add: Total Manufacturing Costs (from above)
- Subtotal
- Less: Ending Work in Process Inventory (this period’s unfinished production)
6. Calculate the Cost of Goods Manufactured
The final COGM figure represents the total cost of products completed and moved to finished goods inventory during the period.
Formula:
Cost of Goods Manufactured = Beginning WIP + Total Manufacturing Costs – Ending WIP
Example Structure
A simplified COGM statement might look like this:
| Components | Amount |
|---|---|
| Beginning Raw Materials | $XX,XXX |
| + Purchases | $XX,XXX |
| = Raw Materials Available | $XX,XXX |
| – Ending Raw Materials | $XX,XXX |
| = Direct Materials Used | $XX,XXX |
| + Direct Labor | $XX,XXX |
| + Manufacturing Overhead | $XX,XXX |
| = Total Manufacturing Costs | $XX,XXX |
| + Beginning WIP Inventory | $XX,XXX |
| – Ending WIP Inventory | $XX,XXX |
| = Cost of Goods Manufactured | $XX,XXX |
Why Is the COGM Statement Important?
Understanding the COGM is critical for several reasons:
- Pricing Decisions: Know your true production costs to set profitable prices.
- Inventory Valuation: Accurately measure finished goods inventory value on the balance sheet.
- Cost Control: Identify rising costs early and take action to improve efficiency.
- Performance Measurement: Compare manufacturing performance over periods.
Benefits of Preparing a Cost of Goods Manufactured Statement
- Insights Into Production Efficiency: Pinpoint inefficiencies and bottlenecks in the process.
- Better Inventory Management: Avoid over- or under-stocking by understanding production flows.
- Accurate Profitability Analysis: Ensure your product costing reflects reality, minimizing surprises.
- Support Budgeting & Forecasting: Use past trends to forecast future production budgets.
Common Challenges in Preparing a COGM Statement
Even experienced manufacturers face hurdles:
- Allocating Overheads: Properly distributing indirect costs (overhead) to products can be complex.
- Accurate Inventory Tracking: Maintaining precise inventory records to avoid misstatements.
- Changing Production Levels: Fluctuations impact cost allocation and inventory values.
- Data Collection: Gathering timely, accurate cost data from different sources.
Best Practices and Practical Tips
To make your COGM statement as accurate and useful as possible, try these expert practices:
1. Maintain Real-Time Inventory Records
– Use modern inventory management systems to track raw materials, WIP, and finished goods daily.
2. Standardize Cost Collection
– Develop clear systems for collecting labor and overhead data, reducing errors and omissions.
3. Regularly Review Overhead Allocation
– Assess whether your overhead distribution methods reflect current production realities and adjust as needed.
4. Integrate with Cost of Goods Sold (COGS) Calculations
– The COGM statement feeds into your COGS calculation, which directly impacts your income statement and profits.
5. Conduct Periodic Variance Analysis
– Compare actual costs to budgeted costs to identify deviations and address issues promptly.
6. Train Your Team
– Ensure everyone involved in data entry and inventory management understands their role and its importance for accuracy.
COGM Statement vs. Cost of Goods Sold Statement
While closely related, the two documents serve slightly different purposes:
- COGM: Calculates the cost to manufacture finished goods during a period.
- COGS: Takes the finished goods at the beginning, adds new goods manufactured (from the COGM), and subtracts ending inventory to find the cost of what’s actually sold.
Getting the COGM right ensures your COGS (and therefore, your entire financial reporting) is accurate.
Summary
A well-prepared Cost of Goods Manufactured statement gives you a clear, accurate picture of your total manufacturing costs. By calculating COGM step-by-step, you gain insights into your production process, manage costs more effectively, and make more informed business decisions. Remember, the more accurately and consistently you gather and analyze your cost data, the more powerful your COGM statement will be for guiding your company’s financial health.
Frequently Asked Questions (FAQs)
1. What is included in manufacturing overhead?
Manufacturing overhead includes all indirect production costs that cannot be traced directly to a product. These include factory rent, utilities, equipment depreciation, maintenance, and salaries of production supervisors.
2. Why is the Cost of Goods Manufactured statement separate from the income statement?
The COGM statement is an internal schedule that details how much it cost to produce goods. This figure is then used on the income statement to help calculate Cost of Goods Sold, which in turn affects gross profit.
3. How often should I prepare a COGM statement?
Most companies prepare the COGM statement monthly, quarterly, or yearly—depending on reporting needs. Regular preparation allows for ongoing cost monitoring and better decision-making.
4. What’s the difference between direct and indirect costs in COGM?
Direct costs can be traced directly to the product (like materials and production labor), while indirect costs (overhead) relate to the manufacturing facility as a whole and support the production process.
5. How can technology help with preparing the COGM statement?
Modern accounting and inventory management systems automate data collection, accurately track materials and costs in real time, and reduce errors, making preparation of the COGM statement faster and more reliable.
By mastering the COGM statement process, you empower your business to understand its core manufacturing costs, paving the way for sustainable growth and profitability.
