Finding Your True Cost of Goods Manufactured

Cost of goods manufactured is one of the key subordinate calculations in determining the total cost of goods sold for a manufacturing company.

The standard equation for calculating the cost of goods manufactured is simple:

• the manufactured goods in process on your start date,
• plus your direct costs (material + labor),
• plus your manufacturing overhead,
• minus your goods in progress on the end date of the calculation.

More complicated is the tracking and assignment of those costs.

One of the standard accounting methods for accurate assignment is the use of a cost of goods manufactured schedule. There are three major cost centers that are included in the schedule:

• ✓ direct materials used,
• ✓ direct labor, and
• ✓ indirect costs.

Direct Materials Used

Four numbers are critical to calculation of cost of goods manufactured and they rely on sound materials management systems to have an accurate starting point. These are:

• ✓ beginning raw materials inventory,
• ✓ cost of raw materials purchased,
• ✓ total raw materials on hand at end of period, and
• ✓ ending raw material inventory.

Direct Labor Used

This is perhaps the easiest to track. Standard accounting practices and payroll records ensure that this is a simple to acquire number. However, this should include not only direct wages paid but the cost of benefits associated with the workforce involved in production.

Indirect Costs/Manufacturing Overhead

This can be the most challenging information to collect. The parallel costs to the direct cost include:

• Indirect materials: from office supplies to repair parts for manufacturing equipment.
• Indirect labor: human resources, accounting, purchasing, facilities maintenance personnel, management.

Other overhead costs include:

• Factory building depreciation
• Factory equipment depreciation
• Insurance and taxes on any factory buildings

Final Calculation

With these values available, the bottom line solution is a simple case of addition and subtraction. The next step is calculating the cost of goods sold. This interim step is valuable for decision making regarding cost management strategies, but it is cost of goods sold that drives bottom line performance and long term production decisions.

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