Cost Of Goods Manufactured Cogm Formula Calculation

What is the Cost of Goods Manufactured?

Cost of Goods Manufactured Formula

The cost of goods manufactured formula is represented as follows,

Cost of Goods Manufactured = Direct Materials Cost (+) Direct Labor Cost (+) Manufacturing Overhead (+) Beginning WIP Inventory (-) Closing WIP Inventory

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Explanation

The Cost of goods manufactured can be calculated by summing up the total cost of manufacturing; which shall include all direct labor costsAll Direct Labor CostsDirect labor costs refer to the total cost incurred by the company for paying the wages and other benefits to its employees against the task performed by them, which are straight away related to the manufacturing of the products or provision of the services.read more, direct materials cost, and other factories’ overhead costsOverhead CostsOverhead cost are those cost that is not related directly on the production activity and are therefore considered as indirect costs that have to be paid even if there is no production. Examples include rent payable, utilities payable, insurance payable, salaries payable to office staff, office supplies, etc.read more; to the opening work-in-process stock and then deducting the ending inventoryEnding InventoryThe ending inventory formula computes the total value of finished products remaining in stock at the end of an accounting period for sale. It is evaluated by deducting the cost of goods sold from the total of beginning inventory and purchases.read more in the process stock. This is nothing but the cost sheet of the company, and it includes prime costPrime CostPrime cost is the direct cost incurred in manufacturing a product and typically includes the direct production cost of goods, raw material and direct labour costs. It is an essential part of total manufacturing expenses. Costing and effective pricing of the goods are primarily determined on their basis.read more as well. Hence adding all of the manufactured stage inventory and all the direct expenses will sum up to the cost of goods manufactured, and when one divides the same by the number of units produced will yield the cost of goods manufactured.

Examples

Example #1

PQR Ltd. has produced the following details from its production department. Therefore, you are required to calculate the cost of goods manufactured.

Direct Material: 800000Direct Labor: 1200000Factory Overheads: 2200000Opening WIP Inventory: 600000Closing WIP Inventory: 480000

Solution

Therefore, the calculation of the cost of goods manufactured is as follows,

= 8,00,000 + 12,00,000 + 22,00,000 +6,00,000 – 4,80,000

Cost of Goods Manufactured will be –

Cost of Goods Manufactured = 43,20,000

Example #2

Mr. W has been working in the FEW manufacturing, and he has been asked to work on creating the cost sheet of the Product “FMG” and present the same in the next meeting. Therefore, the following details have been obtained from the production department.

Number of Units: 500Material Cost Per Unit: 250Labor Cost Per Unit: 200Factory Overheads: 250000Opening WIP Inventory: 79000Closing WIP Inventory: 63200

Based on the above information, you are required to calculate the cost of goods manufactured.

Here we are not given directly Material and Labor CostLabor CostCost of labor is the remuneration paid in the form of wages and salaries to the employees. The allowances are sub-divided broadly into two categories- direct labor involved in the manufacturing process and indirect labor pertaining to all other processes.read more. We need to calculate the same first.

We just need to multiply the cost per unitCost Per UnitCost per unit is defined as the amount of money spent by a corporation over a period of time to produce a single unit of a specific product or service, and it takes into account two components in its calculation: variable and fixed costs. It aids in determining the selling price of the company’s product or services.read more by the number of units as per below:

Calculation of Material and Labor Cost

Material Cost = 250 x 500=125,000Labor Cost = 200 x 500= 100,000
= 125,000 + 100,000 + 250,000 + 79,000 – 63,200

Hence, the cost of goods manufactured will be 490,800.

Example #3

Start industries have started to manufacture a new product called “Avenger Sword.” It will be used during war times and is designed in such a way that it can be used as a sword and as well as a shield. However, being a nonprofit organization, they are not worried about its pricing. But to continue production, they need to recover the cost at least. Hence the management of the start industries has asked the production department to send over the cost incurred while producing the newly invented product “Avenger Sword.”

Below are the details provided by the production department:

Number of Units: 100Material Cost Per Unit: 491250Labor Cost Per Unit: 378000Factory Overheads: 43750000Opening WIP Inventory: 29862000Closing WIP Inventory: 23889600

The above details are in US$ and in thousands. You are required to calculate the cost of goods manufactured and also per unit costUnit CostUnit cost is the total cost (fixed and variable) incurred to produce, store and sell one unit of a product or service. It is calculated by adding fixed and variable expense and dividing it by the total number of units produced.read more.

Material Cost = 491,250 x 100 = 49,125,000Labor Cost = 378,000 x 100 = 37,800,000

= 49,125,000 + 37,800,000+ 4,37,50,000 + 2,98,62,000 – 2,38,89,600

Cost of Goods Manufactured = 13,66,47,400

Hence, the cost of goods manufactured will be 13,66,47,400 and per unit, it will be 1,366,474 when divide it by 100.

Relevance and Uses

Cost of Goods Manufactured or Manufacturing Account calculations serve the following purposes:

It shall help in setting out with appropriate classification of the elements of the costs in detail.This will also aid the management in the reconciliationReconciliationReconciliation is the process of comparing account balances to identify any financial inconsistencies, discrepancies, omissions, or even fraud. At the end of any accounting period, reconciliation involves matching balances and ensuring that debits (credits) from one account for one transaction is same as the credit (debits) to another account for the same transaction.read more of financial records with the costing records.Further, this statement will also serve as the basis for the comparison of operations of manufacturing on a year-to-year basis.All of the above will also allow the firm to properly plan its resource utilization, product pricing strategy, volume production planning, etc.If the firms have schemes such as profit sharing planProfit Sharing PlanA profit-sharing plan is a defined contribution pension plan in which workers and employees are given the opportunity to get their share in the company’s overall profit, incentivizing them to contribute more and more to the company’s profit and motivating them to give their best efforts.read more and are in force, then it may also help them in fixing the amount of production along with profit-sharing bonuses.

What is the Cost of Goods Manufactured?#

Cost of Goods Manufactured Formula#

Explanation#

Examples#

Example #1#

Example #2#

Example #3#

Relevance and Uses#

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