The profitability of any manufacturing business hinges on understanding exactly what it costs to transform raw materials into finished products. The Cost of Goods Manufactured (COGM) statement is your financial blueprint for understanding this transformation process.
While you focus on production efficiency and supply chain challenges, your COGM statement captures every dollar spent on materials, labor, and overhead during production. Without this clarity, you're navigating your business with a significant blind spot. In today's environment of supply disruptions and rising costs, understanding your COGM isn't just good accounting—it's a core competence. When margins are tight, knowing precisely what it costs to produce each item provides crucial insight into your productivity levels, supply chain management, and pricing strategies.
Many manufacturing leaders initially underestimate the power of a properly prepared COGM statement. They’ll keep track of basic costs and have a gut feeling about the profitability of jobs but often miss out on more comprehensive insights that reveal hidden inefficiencies and pricing opportunities. The result? Leaders end up making strategies based on incomplete data.
At G-Squared Partners, we've seen firsthand how manufacturers who master their COGM benefit from the strategic insights this financial statement yields. The knowledge gained from proper manufacturing accounting can be the difference between merely surviving and strategically thriving in today's competitive landscape.
The Cost of Goods Manufactured (COGM) statement bridges the gap between your production floor and financial statements. Unlike the Cost of Goods Sold (COGS) Statement, which simply tracks what you've sold, COGM captures the full cost of what you've produced during a specific period, whether those items have been sold or not.
This distinction is crucial for manufacturing businesses. While retailers and service companies focus primarily on direct purchase costs or labor hours, manufacturers must account for the complex journey of transforming raw materials into finished goods. Your COGM statement provides this manufacturing-specific perspective that's absent from standard financial statements.
A comprehensive COGM statement tracks four primary cost categories:
These are the raw materials that become part of your finished product. Your COGM statement captures not just what you purchased, but the costs of the raw materials actually consumed in production during the period. To calculate your direct materials cost for a specific accounting period, use the following formula:
Beginning Raw Materials Inventory
+
Raw Material Purchases
-
Ending Raw Materials Inventory
=
Direct Materials Used in Production
This calculation ensures you're accounting for actual production usage rather than simply purchase timing. Regularly revisiting this calculation is important, particularly at a time when the cost of raw materials is fluctuating more than ever. Increases in this area can also indicate inefficient production processes that create wastage.
This represents wages ,taxes and benefits for employees directly involved in production. Unlike administrative or sales labor, these costs are specifically tied to hands-on manufacturing activities. Include the labor costs of employees such as:
Allocating employee labor against specific products or production runs is critical in ensuring that you understand the true profitability of different products or jobs.
These are all indirect costs associated with production that can't be directly traced to specific products. These typically include:
Many manufacturers apply an overhead rate; allocating a percentage of the business’s overhead costs against a specific production run or product line. These should be regularly updated for each product you produce since every product consumes a different amount of your organization's resources.
The final element of the COGM accounts for items partially completed at the beginning and end of the period. Your company’s WIP inventory represents the value of the materials, direct labor, and overhead costs of unfinished products currently in your manufacturing process.
WIP inventory is calculated at the end of each accounting period. The value of this inventory is not included in the overall cost of goods manufactured in the accounting period since the inventory remains unfinished. This adjustment ensures your COGM statement only reflects costs associated with goods that were actually completed during the period.
Once you’ve identified all of the inputs, use the following cost of goods manufactured formula to calculate your business’s COGM:
Beginning Work-in-Progress Inventory
+ Direct Materials Used
+ Direct Labor
+ Manufacturing Overhead
- Ending Work-in-Progress Inventory
= Cost of Goods Manufactured
This formula captures the total cost of production for items completed during the period, forming a critical link between your production activities and financial reporting..
A well-implemented COGM statement delivers far more than compliance with accounting standards—it provides strategic insights that can transform your manufacturing operation into a more profitable enterprise.
Many manufacturers struggle with pricing because they lack a complete understanding of their true production costs. Your COGM statement provides the detailed cost breakdowns needed to set prices that ensure adequate margins. This visibility allows you to identify underpriced products, make informed decisions about suppliers, and evaluate new opportunities with confidence.
Without this detailed view, pricing decisions often rely on outdated assumptions or incomplete data. The clarity provided by your COGM statement eliminates this guesswork, allowing you to price strategically based on actual production economics.
Your COGM statement transforms raw financial data into actionable operational insights by highlighting material usage variances, labor cost fluctuations, and overhead rates. These metrics reveal inefficiencies that might otherwise remain hidden.
For example, if material costs increase significantly while production volume remains constant, you’d be able to start an investigation of potential causes. By tracking these financial indicators over time, you can identify trends, implement targeted improvements, and measure their direct impact on your bottom line.
Your COGM statement helps optimize one of your largest assets—inventory—by providing an accurate valuation of raw materials, work-in-progress, and finished goods. This clarity reveals excessive inventory that ties up working capital and identifies opportunities to reduce carrying costs.
Many manufacturers discover through COGM analysis that they're maintaining unnecessary safety stock for certain materials while underestimating the need for others. This insight allows for more strategic allocation of your inventory investment, improving both cash flow and production reliability.
Variance analysis—comparing actual production costs against expected costs—reveals exactly where and why cost increases occur. Instead of merely knowing that margins are shrinking, you can pinpoint specific causes: material price changes, quantity variances from waste, or labor efficiency issues.
This precision empowers leaders to make targeted interventions instead of relying on blunt cost-cutting measures. A manufacturer struggling with margin pressure might discover the problem stems specifically from material waste in one production stage, not labor inefficiency as initially suspected. This allows for strategic improvements that address root causes rather than symptoms.
Implementing effective COGM tracking can be challenging due to the level of complexity involved in manufacturing areas, but the strategic advantages make it worth the effort.
Fortunately, modern ERP systems have transformed manufacturing accounting by directly connecting production data with financial tracking. When properly configured, these systems automatically capture material usage, track labor hours, and allocate overhead based on actual production drivers. This automation eliminates manual adjustments and provides real-time visibility into production costs.
However, technology alone isn't enough. Effective COGM implementation requires well-designed processes and properly trained staff who understand both production realities and accounting requirements.
Understanding and implementing a proper Cost of Goods Manufactured statement provides manufacturers with critical insights into the cost structures that drive the profitability of their business. From unlocking more accurate product costing and strategic pricing capabilities to boosting production efficiency and streamlining inventory optimization, the COGM statement transforms financial data into actionable intelligence.
However, the complexity of manufacturing accounting makes proper COGM implementation challenging. Many manufacturers struggle with work-in-progress valuation, overhead allocation, and integrating financial systems with production data. These challenges require specialized expertise that understands both the shop floor and the financial implications.
At G-Squared Partners, our fractional manufacturing CFO services provide this specialized expertise without the cost of a full-time executive. Our team partners with you to help you design financial systems tailored to your production environment and leverage financial data for strategic advantage. We serve as an extension of your leadership team, providing both the day-to-day financial management and strategic guidance manufacturing businesses need to thrive.
To learn more about how our fractional manufacturing CFO services can help you implement and leverage COGM for manufacturing success, schedule a free consultation today.