If you only calculate the cost of manufacturing your goods after you’ve sold them, it might be a little difficult to break even on some product lines or make a profit altogether.
To turn your business into a competitive, lasting brand, you’ll need to constantly monitor your production costs. That includes the cost of goods manufactured, a key metric that helps manufacturing businesses to stay profitable.
Here’s all you need to know about the cost of goods manufactured, how it impacts your business, and how Cin7 can help you get actionable data from your manufacturing processes.
The cost of goods manufactured (COGM) is a metric you can use to calculate all direct manufacturing-related expenses during a specific accounting period.
But you can’t just add up every expense that’s remotely related to manufacturing. For example, the coffee that keeps your staff productive isn’t considered a direct manufacturing expense.
So, what should you include? That’ll depend on your business’s product-related expenses, such as raw materials, factory overhead, and labor costs.
Similar to the cost of goods sold, the cost of goods manufactured doesn’t include indirect costs, such as:
COGM is especially useful for businesses with a lot of money tied up in unfinished goods (i.e., work in process inventory), such as electronics manufacturing companies.
COGM is also useful for manufacturing companies with a long production process since it includes various types of unfinished inventory.
If you only buy and sell finished products, then the cost of goods manufactured won’t be a useful metric for you — your company must be involved in the production of goods for this metric to be worthwhile.
The calculations for these metrics are similar, with one key difference. The cost of goods sold (COGS) only accounts for goods that have actually been sold.
COGS doesn’t include the cost of goods you hold in stock to prepare for future sales opportunities, like Cyber Monday.
Here’s what this difference means for manufacturing businesses:
If you must wait until an entire batch of goods has been sold before calculating your total manufacturing costs, you’ll miss out on opportunities to save money and increase revenue.
For instance, if you produce a batch of shirts and don’t calculate your total manufacturing costs until after the shirts have all been sold, you might find that your profit margins are much lower than anticipated. Since all the shirts have been sold, you’ll have to move on and hope that you get pricing right during the next production run.
For this reason, it’s best to calculate both your cost of goods manufactured and cost of goods sold.
To get a spot-on idea of total manufacturing costs, you should calculate the cost of goods manufactured before you’ve sold all your goods. This way, you can proactively change selling prices in response to manufacturing cost increases.
And, as the name implies, you should only calculate the cost of goods sold after you’ve sold everything. This will give you a clearer picture of your manufacturing costs and how they compare to your actual sales.
While these metrics are important, they’re ineffective — or even counterproductive — if your calculations aren’t accurate. That’s why you should use inventory management software like Cin7 Core and Omni to ensure every manufacturing expense is taken into account and calculated accurately.
Whether you use a complicated Excel spreadsheet for calculating the cost of goods manufactured or a software solution like Cin7, you’ll need to know the correct formula:
COGM = Beginning Work in Process Inventory + Manufacturing Costs – Ending Work in Process Inventory.
Here’s a breakdown of each part of this COGM calculation:
Your beginning work in process (WIP) inventory is the value of goods in production at the start of an accounting period. In inventory accounting, WIP inventory is an asset on a company’s balance sheet. This inventory isn’t included in the cost of raw materials or finished goods.
For example, cotton is a raw material, but a shirt is generally a finished product. An unfinished garment, such as a jacket that needs buttons to be added, is work in process inventory.
Note that the beginning WIP is carried over from the ending WIP of the previous financial period. This means that your ending WIP on one balance sheet should match the beginning WIP on the next balance sheet.
Total manufacturing costs are your direct expenses from making goods.
Not sure what this includes? Your main manufacturing expenses are the cost of direct materials, direct labor, and manufacturing overheads.
For a clothing manufacturer, direct materials could be fabric, direct labor costs could be the pay given to tailors, and manufacturing overhead could be factory rental fees.
When calculating and analyzing your total manufacturing costs, it’s important to keep perspective and accept that some eye-watering expenses are a necessary part of doing business.
But that doesn’t mean you shouldn’t scrutinize your overall spending to see where savings can be made (without sacrificing quality). For example, if you manufacture shirts but decide to scrimp on fabric, your customers may notice a difference and stop buying from you.
By maintaining product quality and using data from manufacturing metrics to cut expenses, you can stay ahead of your current competitors and the influx of new entrants to the manufacturing market.
According to some estimates, the number of businesses in the manufacturing industry will see a compound annual growth rate (CAGR) of 14.17% from 2024 to 2028.
With these new competitors in your rear-view mirror, how can you make inventory cost savings without losing focus on other business objectives, like growth targets?
The road to inventory harmony starts with your tech stack. With Cin7, all your manufacturing and accounting data lives under one roof where you can easily spot inefficiencies and automate many time-intensive tasks.
For example, Cin7 lets you generate Finished Good Analysis Reports to easily track your total manufacturing costs with accuracy. And you can save even more time and effort by having Cin7 automatically send order notifications, reminders, and reports to key manufacturing stakeholders.
Your ending WIP inventory is the value of unfinished goods at the end of an accounting period. In financial statements, this is carried over from a previous accounting period to become the beginning WIP inventory of a new financial period.
Sounds complicated? It doesn’t have to be. By using Cin7’s accounting and manufacturing features, you can easily track the value of inventory in all your production runs.
In addition, Cin7 offers a wide range of units of measure to help you cut down on manual conversions and calculations, letting you focus on growing your business.
To see how your COGM calculations should work in action, take a look at this example:
Let’s continue with our example of a garment manufacturing startup, which has just begun a new accounting period (e.g., a calendar or fiscal year).
At the start of this new accounting period, the company’s beginning work in process inventory is $10,000. This money could be tied up in jackets that don’t have zippers yet or t-shirts that need screen printing.
Next up, your raw material expenses, such as denim and dye, are $30,000, and you have labor costs (e.g., workers’ wages) of $50,000 and manufacturing overheads (e.g., electricity, water, and factory rent) of $40,000.
This brings your total manufacturing costs ($30,000 + $50,000 + $40,000) to $120,000.
You also need to factor in the unfinished goods at the end of the previous financial period. For this scenario, let’s work with an ending work in process inventory of $20,000.
With every item in COGM covered (beginning WIP, total manufacturing costs, and ending WIP), it’s time to do your final calculations.
First, add your beginning WIP ($10,000) and total manufacturing costs ($120,000). Here, your total is $130,000.
Now, subtract your ending WIP ($20,000) from this sum ($130,000). Your cost of goods manufactured is $110,000 ($130,000 – $20,000).
So, in the end, your COGM calculation should look like this:
Beginning WIP ($10,000) + Total Manufacturing Costs ($120,000) = $130,000 – Ending WIP ($20,000) = $110,000.
Remember: COGM doesn’t include sales or expected profit margins. So, you’ll need to combine COGM with other metrics (e.g., COGS) to get a complete picture of your company’s financial health.
COGM tells you about more than just the cost of raw materials. When done correctly, it can help you:
If you regularly check your cost of goods manufactured, you can reduce expenses and boost gross profits.
For example, when calculating COGM, you may notice a spike in electricity costs, which could mean a machine is damaged or running inefficiently. In this case, some simple maintenance could cut your electricity bills, increase production output, and extend the life of your equipment.
Wherever your rising costs are coming from, you’ll want to investigate them proactively. But before you decide on a cost-cutting approach, make sure your calculations are accurate by double (and triple) checking them, and consider saving time and effort by using an inventory management solution that puts accuracy front and center.
With Cin7, you can easily create and maintain an accurate bill of materials and break it down into unit costs.
In the face of rising manufacturing costs, it’s tempting to increase your selling prices to protect your profits. And you wouldn’t be alone — even multinational corporations like Procter & Gamble hit consumers with double-digit price increases to combat the rising cost of raw materials in 2023.
However, small and medium-sized businesses on tight margins might not be able to hike prices by much without hurting sales. If your customers are a price-sensitive bunch, you’ll need to take a close look at your entire manufacturing operation to find cost savings elsewhere.
When it comes to financial reporting and ensuring regulatory compliance, you can call on COGM for much-needed assistance.
This handy metric can help you create income statements and ensure you’re following best practices wherever your company operates. That said, even with COGM, reconciling financial records is no cakewalk, especially when you rely on several unconnected applications to help with different accounting tasks.
To ease the burden on your accounting team, give them an inventory management solution that’s compatible with your accounting and compliance applications.
Cin7 has robust integrations with accounting apps such as Xero and QuickBooks, and you can sync Cin7 data with tax compliance software like Avalara to ensure everything runs smoothly.
If you use manual inventory management, you’ll need to rely on COGM and many other metrics to get your inventory levels on the money.
But even then, the growing complexity of your inventory management approach might lead to inventory inertia and inefficiency.
If you’d rather focus your time on beating sales targets and reaching new customers, let Cin7’s automation and reporting features pitch in.
Your cost of goods manufactured data, both recent and historical, can help you estimate future material and staffing costs and make sure you have enough funds to cover them.
To boost the insights this metric provides, you can make use of the 100+ reporting and forecasting options offered by Cin7.
Before you crunch the COGM numbers, it’s vital that all the figures you include are up-to-date and as accurate as possible. If the cost and stock levels of raw materials, work in process inventory, and finished goods are way off, COGM won’t solve any of your inventory ills.
But even for the most experienced inventory personnel, manual miscounts and omissions happen. To minimize these errors and give your inventory team a helping hand with every inventory task conceivable, make the switch to robust inventory management software like Cin7.
With Connected Inventory Performance, Cin7 takes the legwork out of ordering raw materials, tracking inventory in different locations, and discovering the true value of the goods you hold.
Request a demo today to learn how Cin7 helps with COGM, COGS, and more.
