How to Calculate Cost of Goods Manufactured (COGM)?
Cost of goods manufactured (COGM) tells you what it actually costs to produce the finished goods that come off your shop floor in a given period. It feeds your cost of goods sold (COGS), gross margin, and pricing decisions.
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Key takeaways
- COGM tells you what it actually cost to produce the goods your shop finished in a period. It feeds cost of goods sold, gross margin, and pricing decisions.
- The formula adjusts total manufacturing cost for unfinished work. COGM = beginning WIP inventory + total manufacturing cost − ending WIP inventory.
- Tracking COGM by product line and month catches problems early. A rising figure can point to supplier price increases, scrap, or overtime before they eat into your margins.
- Most COGM errors come from mixing up cost categories or guessing instead of tracking. Folding in SG&A costs, misclassifying labor, or estimating WIP all skew your cost per unit and your prices.
- Small manufacturers feel COGM swings the hardest. With thinner margins and less room to absorb errors, getting the number right matters more the smaller your shop is.
What is the cost of goods manufactured?
Cost of goods manufactured (COGM) is a metric that shows the total production cost of all goods completed during an accounting period. It includes all costs associated with manufacturing finished products, including both direct (raw materials and labor) and indirect costs (overheads like factory utilities).
COGM does not include selling, general, and administrative (SG&A) expenses, such as marketing, sales commissions, and office rent.
The cost of goods manufactured formula
The cost of goods manufactured formula uses three metrics for the period: total manufacturing cost, beginning work in process (WIP) inventory, and ending WIP inventory.
COGM = beginning WIP inventory + total manufacturing cost – ending WIP inventory
Why is COGM important?
For manufacturers, COGM matters in two places. In accounting, it’s the starting point for cost of goods sold (COGS), which you subtract from revenue to get gross profit. An error in COGM carries through to your margins. COGM also sets the value of the finished goods you add to inventory on the balance sheet.
In management, COGM shows what production really costs. Divide it by the units you completed, and you can check that your prices cover your costs. That check matters more than ever right now. In the NAM Q2 2026 survey, 83% of manufacturers named rising raw material costs as their top challenge. When input prices climb, they show up in COGM first.
Track it month to month and by product line, and a rising figure warns you early about problems such as supplier price increases, scrap, or overtime, before they eat into your margins. This makes COGM a core tool for manufacturing cost control.
Accountants traditionally calculate COGM at period end. However, modern manufacturing software with a perpetual inventory system makes it possible to track COGM in real time, based on actual production data.
Every manufacturing order records the materials, labor, and overhead that went into it, so you can trace a rise in costs back to the part or step that caused it.
With MRPeasy, we can go back to a manufacturing order and see a full cost breakdown—exactly which parts were unusually expensive, which routing steps were more labor-intensive, and so on. That level of detail is incredibly valuable.
– Alfred Neufeld, Senior Production Engineer, Technodynamics
Calculating cost of goods manufactured
To calculate COGM, you need two parts: your total manufacturing cost for the period, and the value of your work in process (WIP) at the start and end of it. Again, the formula for COGM.
COGM = beginning WIP inventory + total manufacturing cost (TMC) − ending WIP inventory
Total manufacturing cost (TMC)
Total manufacturing cost (also called total cost of production) is everything you spend on production during a period, whether or not it leads to finished products. You can calculate TMC using the following formula:
TMC = direct materials + direct labor + manufacturing overhead
Direct materials are the raw materials and components that go into the finished product. Count only the materials you actually used during the period. Here’s the formula to calculate your direct materials.
Direct Materials Used = Beginning Raw Materials + Purchases – Ending Raw Materials
Direct labor costs include the wages, benefits, and payroll taxes of the workers who make the product, such as machine operators and assemblers. Pay for office staff, such as accountants and administrative managers, isn’t part of direct labor or COGM. It belongs in SG&A expenses.
Manufacturing overhead is all other factory costs that production requires but can’t be traced to a single unit. Manufacturing overhead can include factory rent, factory utilities, equipment depreciation, property taxes, and insurance. It also includes indirect materials used in production, but which aren’t necessarily part of a product (e.g., sandpaper or lubricants).
Work in process (WIP) inventory
WIP inventory is the value of materials, labor, and overhead in products you’ve started but not yet finished. You can consider work in process inventory a current asset on your company’s balance sheet. You calculate ending WIP at the end of each period, and that figure becomes the next period’s beginning WIP:
- Beginning WIP is the value of unfinished work carried over from the previous period. It adds to COGM because those costs become part of the goods you complete this period.
- Ending WIP is the value of work still unfinished at the end of the period. You subtract ending WIP because these are the goods you weren’t able to finish, and so the costs belong to next period’s output
If beginning and ending WIP are both zero, then COGM equals your total manufacturing cost. Most manufacturers aim to keep ending WIP low, since it ties up working capital and makes period-end valuation harder.
Calculating WIP manually is difficult because you need to allocate materials, labor, and factory overhead to each open work order.
Manufacturing software can make this easier by recording materials and labor against each order as the work happens, keeping your WIP value up to date.
Once you have each piece, add direct materials, direct labor, and manufacturing overhead to get your total manufacturing cost. Then add beginning WIP and subtract ending WIP to arrive at COGM.
Example of a COGM calculation
To see how the formula works in practice, let’s walk through an example of the COGM calculation for a furniture manufacturer.
At the start of the fiscal quarter, the manufacturing company has $5,000 worth of furniture in the making. This is their beginning balance of WIP inventory.
By the end of the quarter, the company’s MRP system shows that there’s still $8,500 worth of furniture unfinished. This is the ending WIP Inventory.
The company has a raw materials inventory of $8,000 and adds another $5,000 worth of stock during the quarter. At the end of the period, they have $3,000 worth of stock left. Therefore, the cost of direct materials is $10,000 ($8,000 + $5,000 – $3,000).
The company employs eight shop floor workers, which equals $30,000 in payroll. This is their direct labor.
Manufacturing overhead for the quarter equals $13,500.
With these costs, their total manufacturing cost for the quarter is:
$10,000 + $30,000 + $13,500 = $53,500.
The company gets their cost of goods manufactured by adding beginning WIP inventory ($5,000) and total manufacturing cost ($53,500), then subtracting ending WIP inventory ($8,500). This comes out to a COGM of $50,000.
How to prepare a schedule of cost of goods manufactured
A schedule of cost of goods manufactured (or statement of cost of goods manufactured) is a short report that shows how you arrive at COGM for a period.
The schedule follows the COGM formula from top to bottom. It starts with materials used, adds direct labor and overhead, and then adjusts for work in process.
Continuing from the example of the furniture manufacturer in the previous section, here is the fiscal quarter as a schedule.
| Schedule of cost of goods manufactured (Q1) | $ (Amounts in brackets are subtracted) |
|---|---|
| Beginning raw materials inventory | 8,000 |
| Add: purchases | 5,000 |
| Less: ending raw materials inventory | (3,000) |
| Direct materials used | 10,000 |
| Direct labor | 30,000 |
| Manufacturing overhead | 13,500 |
| Total manufacturing cost | 53,500 |
| Add: beginning WIP inventory | 5,000 |
| Less: ending WIP inventory | (8,500) |
| Cost of goods manufactured | 50,000 |
Your accountant most likely will prepare the schedule at period-end. The COGM total moves to the income statement, where it serves as the starting point for cost of goods sold. Ending raw materials and ending WIP stay on the balance sheet as inventory.
The schedule is also useful outside accounting. For example, if COGM rises from one period to the next, compare the schedules line by line. You’ll be able to see whether the increase came from materials, labor, overhead, or more unfinished work at period end.
Mistakes to avoid when calculating COGM
When calculating cost of goods manufactured, most errors come from mixing up categories or going off guesswork. It’s important to understand and avoid these mistakes, as each one can skew your cost per unit, and with it your prices and margins.
- Including non-production costs. Expenses like office rent, marketing, and sales salaries belong in SG&A, not COGM.
- Misclassifying labor. Supervisor, maintenance, and quality control pay is indirect labor and belongs in overhead. If your team splits time between running machines and other tasks, track hours by task so only actual shop floor time counts as direct labor.
- Using materials purchased instead of materials used. COGM should only include materials that actually went into production, not everything you bought.
- Skipping the WIP adjustment. Without it, you’re reporting total manufacturing cost, not COGM. This matters most for shops with long lead times or large custom orders, where a lot of value sits in WIP at month-end.
- Underestimating overhead. Depreciation, equipment maintenance, and factory insurance rarely show up on a work order, so they’re easy to forget. Leave them out and every product looks cheaper than it really is. Review your overhead rate at least once a year, or whenever rent, energy, or headcount changes.
- Guessing WIP values. A rough estimate distorts both COGM and COGS, and the error carries into next period’s beginning WIP. Track materials and labor against each work order so you can value WIP from records, not a walk around the shop floor.
COGM vs TMC vs COGS
TMC, COGM, and COGS are easy to confuse because they use many of the same costs, but each is meant to answer a different question in manufacturing accounting.
Total manufacturing cost (TMC) is everything you spent on production in the period. COGM adjusts TMC for unfinished work: it adds beginning WIP and subtracts ending WIP.
COGS then adjusts COGM for finished goods still in stock to give the cost of the goods you sold.
| Metric | What it measures | Formula |
|---|---|---|
| Total manufacturing cost (TMC) | All production costs incurred in an accounting period | TMC = Direct materials + direct labor + overhead |
| Cost of goods manufactured (COGM) | Cost of goods completed in a period | COGM = Beginning WIP + TMC − ending WIP |
| Cost of goods sold (COGS) | Cost of goods sold in a period | COGS = Beginning finished goods + COGM − ending finished goods |
Read more about Calculating the Cost of Goods Sold in Manufacturing.
How to use COGM in a small manufacturing business
Calculating COGM is only half the job. The real value comes from using it in the places where you make decisions about money. If you’re a small manufacturer without a big finance team, those are usually these four.
- Your period-end books. COGM is the total at the bottom of your schedule of cost of goods manufactured. It feeds COGS on your income statement, and your remaining raw materials, WIP, and finished goods appear as inventory on the balance sheet.
- Pricing and quotes. Divide COGM for a product line by the units you completed to get an average cost per unit. Check that your prices cover this average cost per unit with room for margin. Revisit them whenever material or labor costs move, not just once a year.
- Monthly cost check-ins. Compare cost per unit from one month to the next. A jump usually traces back to material prices, overtime and rework, or the same overhead spread over fewer units.
- Loan and credit applications. Banks look closely at gross margin, which depends on an accurate COGS, and COGS starts with COGM. Having a clear picture of your COGM each month can make things like loan and credit applications easier.
If month-end currently means an Excel spreadsheet and a physical count, start small: calculate COGM once a quarter, then move to monthly once your inventory records are reliable.
Using a manufacturing ERP to track COGM
When your business is small, you can use spreadsheets to calculate COGM. And that’s where most manufacturers start. 64% of manufacturing SMBs rely on spreadsheets before they adopt ERP software.
But as orders, SKUs, and staff grow, keeping material usage, labor hours, and WIP up to date by hand becomes slow and error-prone.
COGM becomes a number you see weeks after the period closes. A manufacturing ERP system makes it easier to record costs as work happens, so your COGM stays current.
Here’s what can change with a manufacturing ERP:
- Material costs come from actual consumption: When your team picks materials for a manufacturing order, the system deducts them from stock at their actual purchase cost, and you see exactly what went into production. With features like serial number tracking, you can get better visibility into which components ended up in each finished unit.
- The system logs labor against each job: Workers can clock in and out of operations through the software, so direct labor reflects real hours per order instead of a share of total payroll.
- The system applies overhead automatically. You set overhead rates once, for example per workstation hour, and the system adds them to every order. Products no longer look cheaper than they are just because nobody remembered costs like depreciation.
- WIP values itself: Every open order carries the materials and labor your team has booked to it so far, so you can see the value of unfinished work at any time without walking the shop floor.
- Costs flow into your books. Systems that integrate with Xero and QuickBooks can send cost data to your accounting software, so your bookkeeper doesn’t re-key numbers. For example, Fresh Fizz Sodas uses its MRP system to feed COGS and inventory value straight into Xero.
Keep in mind that a manufacturing ERP makes it much easier to track COGM, but its numbers are only as good as the data you put in. This means cleaning your bills of materials and routings so they accurately reflect material and labor costs. Work out realistic overhead rates too.
After go-live, you need to update and review data on a regular basis. Your team should record material picks and time against the right orders and mark manufacturing orders as finished when the goods are actually done. If finished products sit on the floor without anyone booking them into stock, the system still counts them as WIP, and your COGM comes out too low.
Build these habits, and a manufacturing ERP lets you see COGM for any time period, product, or order without waiting for the month-end close.
You may also like: How to Calculate the Selling Price of Your Products?
Frequently asked questions
COGM includes every cost of making the product: direct materials, direct labor, and manufacturing overhead costs. For a small machine shop, the bar stock, castings, and purchased fasteners that go into the finished parts are direct materials. Wages of the machinists and CNC operators are direct labor. CNC machine depreciation, maintenance, and rent are overhead. Delivery vans, office supplies, and sales commissions stay out, because they support selling and running the business, not the production process.
The cost of goods manufactured is included in a company’s income statement, usually together with the beginning and ending finished goods inventories. It’s used also for calculating the cost of goods sold.
COGM is the cost of everything you finished making in a period. COGS is the cost of what you actually sold. If a cabinet maker builds 40 kitchen units in April at $1,500 each, its COGM is $60,000. If it had no finished stock left from March and ships 30 units in April, its COGS is $45,000. COGM tells you what production cost you, while COGS is what lands on your income statement and determines your gross profit for the month.
A schedule of cost of goods manufactured is a short report that shows how you arrive at your COGM for a period. Your accountant usually prepares it at period end. It lists the direct materials you used, direct labor, and manufacturing overhead, then adjusts for beginning and ending work in progress. The bottom line is your COGM, which feeds the cost of goods sold section of your income statement. Think of it as the receipt behind one number on your financial statements.
To get COGM per unit, divide COGM by the number of units you completed in the period. If a candle maker’s COGM for the month is $18,000 and it finishes 6,000 candles, that works out to a COGM per unit of $3. An overall average can hide big differences between products. A three-wick jar candle might cost $6 to make while a tea light costs $0.80. Calculate cost per unit by product line or by manufacturing order, and recalculate it whenever material or labor costs change.
Manufacturing software records the materials, labor, and overhead on every manufacturing order as work happens, so you don’t have to rebuild COGM from spreadsheets and stock counts. Manufacturing ERP software gives you actual cost per order, a live WIP value, and finished goods inventory. Integrations can also pass cost data directly to your accounting. The payoff grows with your product range and order volume.
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