Ever wondered how manufacturers keep tabs on their production costs and profits? The secret lies in a well-prepared schedule of cost of goods manufactured. Whether you’re managing a factory or studying business, understanding this process is crucial for tracking expenses, setting prices, and making informed decisions.
In this article, you’ll discover a simple, step-by-step guide to creating an accurate schedule of cost of goods manufactured, complete with helpful tips for each stage.
How to Prepare a Schedule of Cost of Goods Manufactured
A schedule of cost of goods manufactured (COGM) is one of the cornerstones of managerial accounting for any manufacturing business. It details the total production cost of the goods completed during a specific period. Understanding how to prepare this schedule helps you keep production costs under control, set accurate product prices, and maintain financial transparency.
Let’s walk through what COGM is, why it’s important, and how you can prepare a detailed, understandable schedule step by step.
What is a Schedule of Cost of Goods Manufactured?
At its core, the schedule of cost of goods manufactured summarizes the manufacturing costs incurred to produce finished products during a specific period, such as a month or quarter. This schedule forms the link between production and financial performance, feeding directly into your cost of goods sold (COGS) calculation on the income statement.
In simple terms, the COGM shows:
– Direct material and labor costs
– Overhead expenses
– The flow of inventory through Raw Materials, Work in Process, and Finished Goods
Why is the Schedule of Cost of Goods Manufactured Important?
Before we dive into preparation steps, it’s useful to know why businesses create this schedule:
- Informed Pricing: It helps determine the baseline cost required to manufacture goods, aiding in setting selling prices.
- Cost Control: Pinpoints areas where costs are high, so you can take action to improve efficiency.
- Inventory Management: Clarifies how much was started, left over, and completed within a period.
- Financial Accuracy: Ensures your financial statements reflect true production costs.
Manufacturers, accountants, and financial managers all rely on the COGM to guide their decisions.
Key Components of the COGM Schedule
A typical COGM schedule is made up of these main components:
- Direct Materials
- Beginning Raw Materials Inventory
- Plus: Raw Materials Purchased
- Less: Ending Raw Materials Inventory
-
Equals: Raw Materials Used
-
Direct Labor
- Manufacturing Overhead
-
Includes indirect materials, indirect labor, utilities, depreciation on production equipment, maintenance, factory rent, etc.
-
Work in Process Inventory
- Add: Beginning Work in Process
- Add: Total Manufacturing Costs (Direct Materials Used + Direct Labor + Manufacturing Overhead)
- Less: Ending Work in Process Inventory
The final figure, COGM, represents the total manufacturing cost of goods that were finished during the period.
Step-by-Step: How to Prepare a Schedule of Cost of Goods Manufactured
Here’s a detailed, straightforward process to prepare a COGM schedule:
1. Gather Beginning and Ending Inventories
Start by collecting the following figures at the start and end of your period:
– Raw Materials Inventory (beginning and end)
– Work in Process (WIP) Inventory (beginning and end)
– Finished Goods (mainly for Cost of Goods Sold, not COGM)
2. Calculate Raw Materials Used
Add the beginning inventory of raw materials to any purchases during the period. Subtract the ending inventory to find the cost of raw materials actually used in production.
Formula:
Raw Materials Used = Beginning Raw Materials + Purchases – Ending Raw Materials
- Example:
- Beginning Raw Materials: $10,000
- Purchases: $55,000
- Ending Raw Materials: $8,000
- Raw Materials Used: $10,000 + $55,000 – $8,000 = $57,000
3. Determine Total Manufacturing Costs
Add together:
– Raw materials used (from Step 2)
– Direct labor costs for the period
– Manufacturing overhead incurred
Formula:
Total Manufacturing Costs = Raw Materials Used + Direct Labor + Manufacturing Overhead
4. Adjust for Work in Process Inventory
The Work in Process (WIP) inventory accounts for partially completed goods. You need to factor in how much was already in process at the beginning and how much is left at the end of the period.
Calculate as follows:
– Start with beginning WIP
– Add total manufacturing costs (from Step 3)
– Subtract ending WIP
Formula:
COGM = Beginning WIP Inventory + Total Manufacturing Costs – Ending WIP Inventory
- Example:
- Beginning WIP: $15,000
- Total Manufacturing Costs: $90,000
- Ending WIP: $12,000
- COGM: $15,000 + $90,000 – $12,000 = $93,000
5. Prepare the COGM Schedule
Bring it all together in a simple, structured table:
| Description | Amount ($) |
|---|---|
| Beginning Raw Materials | 10,000 |
| Add: Raw Materials Purchased | 55,000 |
| Less: Ending Raw Materials | (8,000) |
| Raw Materials Used | 57,000 |
| Add: Direct Labor | 25,000 |
| Add: Manufacturing Overhead | 30,000 |
| Total Manufacturing Costs | 112,000 |
| Add: Beginning WIP Inventory | 15,000 |
| Less: Ending WIP Inventory | (12,000) |
| COGM | 115,000 |
You can use a spreadsheet or accounting software to create this schedule for greater accuracy and efficiency.
Benefits of Preparing a COGM Schedule
Understanding your COGM can transform the way you manage your business. Here’s how:
- Transparency: Clear insight into exactly where your production money goes.
- Performance Analysis: Detect trends and inefficiencies over time.
- Budgeting: Use historical COGM data to set more realistic future budgets.
- Creditworthiness: Lenders and investors often review production costs as part of their evaluation processes.
- Internal Decision-Making: Helps managers make informed decisions about outsourcing, pricing, and investment in new equipment.
Common Challenges and How to Address Them
While preparing a COGM schedule isn’t overly complex, you might face a few hiccups along the way. Here’s how to address the most common ones:
1. Allocating Manufacturing Overhead
Deciding how to allocate costs like factory rent or utilities can be tricky. Best practices include:
– Develop reasonable bases for allocation (machine hours, direct labor hours, etc.)
– Update overhead rates regularly to reflect actual usage
2. Managing Inventory Accuracy
If beginning and ending inventories aren’t accurate, your schedule will be off. Tips for improving this include:
– Implement periodic inventory counts
– Keep records up to date in your accounting system
3. Separating Direct and Indirect Costs
Be careful to distinguish between direct materials/labor and indirect overhead. Direct costs are traceable to a specific product; indirect (overhead) costs are shared across multiple products or departments.
4. Using the Correct Time Period
Always match your COGM schedule to the time frame of your financial statements (monthly, quarterly, annually).
5. Manual Errors
Errors can occur with manual calculations. Whenever possible:
– Use accounting software for automation
– Double-check entered figures for accuracy
Practical Best Practices
To make your schedule as useful as possible, follow these tips:
- Standardize the Process: Use a consistent format and calculation method each period.
- Consult Your Team: Work with production managers for accurate inventory and overhead figures.
- Automate When Possible: Leverage ERP or accounting software to improve speed and accuracy.
- Perform Variance Analysis: Compare COGM to budgeted costs to identify areas for improvement.
- File Schedules Carefully: Keep past COGM schedules for trend analysis and audits.
Recap: Bringing It All Together
Preparing a schedule of cost of goods manufactured may seem technical, but it’s an invaluable tool for anyone serious about production management and financial performance. By following a logical step-by-step method, being diligent about your numbers, and applying practical best practices, you gain powerful insights that drive profitability and business growth.
Remember, the process starts with good inventory control and ends with smart, data-driven decisions. Over time, mastering the COGM schedule can set your manufacturing business apart from the competition.
Frequently Asked Questions (FAQs)
1. What’s the difference between cost of goods manufactured (COGM) and cost of goods sold (COGS)?
COGM measures the total production cost of goods finished during a period. COGS, on the other hand, includes COGM but also factors in the change in finished goods inventory, reflecting only the costs of goods actually sold to customers.
2. How often should I prepare a COGM schedule?
Most businesses prepare a COGM schedule monthly or quarterly to match financial reporting cycles, review cost trends, and keep management informed. However, the frequency depends on your business size, complexity, and managerial needs.
3. What’s included in manufacturing overhead?
Manufacturing overhead includes indirect costs not directly traceable to a specific product, such as:
– Indirect materials (e.g., cleaning supplies)
– Indirect labor (e.g., maintenance staff)
– Utilities, rent, insurance on the factory
– Depreciation of manufacturing equipment
– Maintenance and repairs
4. Is direct labor always easy to calculate?
Direct labor is the cost of wages for employees directly involved in production. It’s usually tracked via timesheets or job cards, but can be complex to calculate if employees work across multiple products or processes. Clear tracking systems help ensure accuracy.
5. Can I use the COGM schedule for service-based businesses?
The COGM schedule is specifically designed for manufacturing businesses that produce tangible goods. While service businesses don’t use COGM, similar concepts (like tracking direct costs and overhead) can help improve transparency and profitability in service environments.
With this foundation, you’re equipped to create a clear, accurate, and insightful schedule of cost of goods manufactured that empowers smarter business decisions.
