{"id":2607,"date":"2026-10-23T14:18:05","date_gmt":"2026-10-23T14:18:05","guid":{"rendered":"https:\/\/www.mrpeasy.com\/blog\/?p=2607"},"modified":"2026-10-27T07:08:24","modified_gmt":"2026-10-27T07:08:24","slug":"calculating-cost-of-goods-sold-in-manufacturing","status":"publish","type":"post","link":"https:\/\/www.mrpeasy.com\/blog\/calculating-cost-of-goods-sold-in-manufacturing\/","title":{"rendered":"Cost of Goods Sold in Manufacturing: A Guide to Accurate COGS Calculations for SMEs"},"content":{"rendered":"\n<p class=\"wp-block-paragraph\">COGS is an important calculation used in determining whether a final price will cover production costs. But there&#8217;s often an erroneous assumption. COGS isn&#8217;t the break-even point. This article shows how to calculate it without making the common mistakes.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><a href=\"https:\/\/www.mrpeasy.com\/blog\/wp-content\/uploads\/2023\/02\/cost-of-goods-sold.jpg\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"571\" src=\"https:\/\/www.mrpeasy.com\/blog\/wp-content\/uploads\/2023\/02\/cost-of-goods-sold-1024x571.jpg\" alt=\"cost-of-goods-sold-cogs\" class=\"wp-image-13709\" srcset=\"https:\/\/www.mrpeasy.com\/blog\/wp-content\/uploads\/2023\/02\/cost-of-goods-sold-1024x571.jpg 1024w, https:\/\/www.mrpeasy.com\/blog\/wp-content\/uploads\/2023\/02\/cost-of-goods-sold-300x167.jpg 300w, https:\/\/www.mrpeasy.com\/blog\/wp-content\/uploads\/2023\/02\/cost-of-goods-sold-768x428.jpg 768w, https:\/\/www.mrpeasy.com\/blog\/wp-content\/uploads\/2023\/02\/cost-of-goods-sold.jpg 1502w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/a><\/figure>\n\n\n\n<!--more-->\n\n\n\n<section class=\"mrp-key-takeaways\"><p class=\"mrp-key-takeaways__title\">Key takeaways<\/p><div class=\"mrp-key-takeaways__content\">\n<ul class=\"wp-block-list\">\n<li>The cost of goods sold (COGS) is the total production cost of goods that have been sold. It\u2019s different from the cost of goods manufactured (COGM), and it doesn\u2019t designate the break-even point.<\/li>\n\n\n\n<li>To determine whether a cost belongs in COGS, ask: Did the cost exist to make the product or to run the business?<\/li>\n\n\n\n<li>Gray areas exist, particularly for small shops. Owner time in production, buildings shared by administration and production, and outbound shipping costs all require consistent accounting decisions.<\/li>\n\n\n\n<li>The inventory valuation method you use affects COGS. It\u2019s best to stick to one method and understand how it divides costs between COGS and ending inventory.<\/li>\n\n\n\n<li>Manufacturing software with a perpetual inventory management system greatly simplifies COGS calculations and automatically updates accounting records as transactions occur.<\/li>\n<\/ul>\n<\/div><\/section>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_88 counter-hierarchy ez-toc-counter ez-toc-custom ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #343333;color:#343333\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #343333;color:#343333\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/www.mrpeasy.com\/blog\/calculating-cost-of-goods-sold-in-manufacturing\/#What_is_the_cost_of_goods_sold_COGS\" >What is the cost of goods sold (COGS)?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/www.mrpeasy.com\/blog\/calculating-cost-of-goods-sold-in-manufacturing\/#Cost_of_goods_sold_vs_cost_of_goods_manufactured\" >Cost of goods sold vs. cost of goods manufactured<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/www.mrpeasy.com\/blog\/calculating-cost-of-goods-sold-in-manufacturing\/#Manufacturing_COGS_calculation_a_practical_example\" >Manufacturing COGS calculation: a practical example<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/www.mrpeasy.com\/blog\/calculating-cost-of-goods-sold-in-manufacturing\/#What_should_and_shouldnt_be_included_in_COGS_for_manufacturers\" >What should and shouldn&#8217;t be included in COGS for manufacturers?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/www.mrpeasy.com\/blog\/calculating-cost-of-goods-sold-in-manufacturing\/#Gray_areas_when_designating_COGS\" >Gray areas when designating COGS<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/www.mrpeasy.com\/blog\/calculating-cost-of-goods-sold-in-manufacturing\/#Three_common_small_business_COGS_mistakes\" >Three common small business COGS mistakes<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/www.mrpeasy.com\/blog\/calculating-cost-of-goods-sold-in-manufacturing\/#How_does_your_inventory_valuation_method_change_COGS\" >How does your inventory valuation method change COGS?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/www.mrpeasy.com\/blog\/calculating-cost-of-goods-sold-in-manufacturing\/#Tips_on_increasing_COGS_accuracy_in_practice\" >Tips on increasing COGS accuracy in practice<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/www.mrpeasy.com\/blog\/calculating-cost-of-goods-sold-in-manufacturing\/#How_does_manufacturing_software_help_with_COGS_accuracy\" >How does manufacturing software help with COGS accuracy?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-10\" href=\"https:\/\/www.mrpeasy.com\/blog\/calculating-cost-of-goods-sold-in-manufacturing\/#Frequently_asked_questions_FAQ\" >Frequently asked questions (FAQ)<\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_is_the_cost_of_goods_sold_COGS\"><\/span><strong>What is the cost of goods sold (COGS)?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">The cost of goods sold, or COGS, is the sum of production costs for products sold during a specified accounting period. This includes stock that was built during an earlier period. The calculation incorporates all direct costs and some, but not all, indirect costs associated with the products&#8217; manufacture. COGS is sometimes labeled as cost of sales in a financial statement. But it&#8217;s usually the same figure.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>COGS entails:<\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Raw materials (<strong>direct material cost<\/strong>).<\/li>\n\n\n\n<li>Purchased and\/or preassembled components (also direct material cost).<\/li>\n\n\n\n<li>Labor used to manufacture or assemble the products (<strong>direct labor cost<\/strong>).<\/li>\n\n\n\n<li>All normal factory overhead, aka manufacturing overhead (<strong>indirect cost<\/strong>).<\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">While some definitions of COGS exclude indirect costs, we&#8217;re including them, as we&#8217;ll explain in a minute. Another concept to keep in mind is that the key to the COGS calculation lies in the word &#8220;sold.&#8221; Unsold finished goods are included in inventory on the balance sheet. They don&#8217;t belong in a COGS calculation. <\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Having an accurate COGS overview is crucial for SMEs, as many business decisions (quotes, <a href=\"https:\/\/www.mrpeasy.com\/blog\/selling-price\/\" target=\"_blank\" rel=\"noreferrer noopener\">selling price<\/a>, price lists, and push\/drop choices) depend on it. Revenue minus COGS equals the company&#8217;s gross profit. And gross profit pays the bills, such as office rent, sales and marketing campaigns, and non-production payroll. Anything left is profit.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>Where COGS sits on the income statement<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">COGS is a specific line item on an income statement. It has a defined position and affects everything below it. Here&#8217;s where COGS and each corresponding element belong:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Revenue minus COGS equals gross profit.<\/li>\n\n\n\n<li>Gross profit minus operating expenses (OPEX) equals operating profit, also known as operating income.<\/li>\n\n\n\n<li>Operating profit minus interest and taxes equals a simplified net income.<\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>For a quick check of pricing and profitability, divide gross profit by revenue to find the gross profit margin.<\/strong><\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Income statement items that sit below COGS but not in it are operating expenses, such as administrative salaries, sales and marketing expenditures, office rent, software, and business and office insurance.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">COGS isn&#8217;t the correct number to use for determining the break-even point for production costs. For example, if a product costs $40 to make and is priced at $40, not only does it generate zero gross profit, but OPEX costs are still due. That means you lose money on every unit sold. Break-even calculations differ and include both fixed and variable costs per unit. They answer the question: How many units do we need to sell to cover everything?<\/p>\n\n\n<div class=\"banner-v2\">\n    <p class=\"banner-v2__desc\">Effortlessly track costs and orders with MRPeasy<\/p>\n    <a class=\"banner-v2__link\" href=\"https:\/\/www.mrpeasy.com\/sign-up\/\" target=\"_blank\" data-ga-event=\"blog_signup_banner_blue\">Try for free<\/a>\n<\/div>\t\t<style>.banner-v2 {\n    float: right;\n    display: flex;\n    flex-direction: column;\n    justify-content: center;\n    align-items: center;\n    padding: 40px 32px;\n    gap: 16px;\n    width: 356px;\n    height: 205px;\n    background: linear-gradient(199.68deg, #6084E5 13.17%, #5FA7DD 82.1%);\n    border-radius: 4px;\n    margin-left: 12px;\n    margin-bottom: 12px;\n    margin-top: 15px;\n}\n\n@media (max-width: 767.98px) {\n    .banner-v2 {\n         width: 100%;\n         height: 173px;\n         margin-bottom: 0;\n         margin-left: 0;\n    }\n}\n\n.single__content p.banner-v2__desc {\n    margin: 0 !important;\n}\n\np.banner-v2__desc {\n    width: 292px;\n    font-style: normal;\n    font-weight: 700;\n    font-size: 22px;\n    line-height: 29px !important;\n    text-align: center;\n    color: #FFFFFF;\n    margin: 0 !important;\n    order: 0 !important;\n}\n\n.single__content a.banner-v2__link {\n    color: #FFFFFF !important;\n}\n\n.single__content a.banner-v2__link:hover {\n    color: #003557 !important;\n}\n\na.banner-v2__link {\n    display: flex;\n    justify-content: center;\n    align-items: center;\n    width: 181px;\n    height: 51px;\n    padding: 18px 0;\n    border-radius: 4px;\n    background: #003557;\n    font-weight: 700;\n    font-size: 16px;\n    color: #FFFFFF !important;\n    text-decoration: none !important;\n    order: 1 !important;\n}\n\n.banner-v2__link:hover {\n    background: white;\n    color: #003557 !important;\n}<\/style>\n\t\t\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Cost_of_goods_sold_vs_cost_of_goods_manufactured\"><\/span><strong>Cost of goods sold vs. cost of goods manufactured<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">Whereas COGS records the cost of products actually sold during a specific accounting period, the&nbsp;<a href=\"https:\/\/www.mrpeasy.com\/blog\/cost-of-goods-manufactured-cogm\/\" target=\"_blank\" rel=\"noreferrer noopener\">cost of goods manufactured&nbsp;(COGM)<\/a> records the cost incurred to produce finished products during that same period, whether or not they were sold. COGM pertains to what went into finished goods inventory (what was made), and COGS refers to everything that came off that inventory (what was sold).<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Here they are expressed as formulas:<\/p>\n\n\n\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\">\n<p class=\"has-medium-font-size wp-block-paragraph\"><strong>COGM = Beginning WIP inventory + Total manufacturing cost \u2212 Ending WIP inventory<\/strong><\/p>\n\n\n\n<p class=\"has-medium-font-size wp-block-paragraph\"><strong>COGS = Beginning finished goods inventory + COGM \u2013 Ending finished goods inventory<\/strong><\/p>\n<\/blockquote>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>COGS and COGM in a build-ahead month<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">This is an example of a <a href=\"https:\/\/www.mrpeasy.com\/blog\/make-to-stock-mts-manufacturing-process-flow-and-best-practices\/\" target=\"_blank\" rel=\"noreferrer noopener\">Make-to-stock manufacturer<\/a> building a seasonal product order. Starting with an empty shelf at the beginning of the month, the company finished 1,000 units of the specialty item by the end of the month. The units cost $100 each to make. So the COGM, based on 1,000 completed units, is $100,000.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">By the end of that month, they sold and shipped 400 units at $170 per unit. The mistake would be using COGM as the COGS. This would make a profitable month look like a loss. Here&#8217;s why:<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Revenue from the 400 units sold is $68,000. If the owner used the COGM for the sold units, the math would look like this:<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">$68,000 (revenue) \u2013 $100,000 (COGM) = -$32,000 gross profit. It looks like a loss.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The problem is that the 600 unsold units ($60,000) are still sitting on the shelf in inventory as an asset on the balance sheet. The correct way to figure the gross profit is to use COGS. Here&#8217;s what that looks like:<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">$68,000 (revenue) minus $40,000 (COGS=400x$100) equals $28,000 (gross profit).<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>COGS and COGM in make-to-order shops<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">In <a href=\"https:\/\/www.mrpeasy.com\/blog\/mto-and-ato-manufacturing-process\/\" target=\"_blank\" rel=\"noreferrer noopener\">make-to-order<\/a> (MTO) shops, the calculations remain the same. But the timing can get hazy. Production only starts after a customer places an order. There will likely be little or no finished stock on the inventory shelf. But the same rule applies. COGS covers everything sold, regardless of why or when it was built.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The upside is that COGM and COGS often run very close in MTO. Jobs go to <a href=\"https:\/\/www.mrpeasy.com\/blog\/work-in-process-inventory-accounting\/\" target=\"_blank\" rel=\"noreferrer noopener\">WIP (work in process)<\/a>, then to finished, then shipped out the door quickly. The finished goods inventory is near zero. Because of small beginning and ending shelf numbers, COGM and COGS are nearly the same.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The hazy part comes when jobs are split at the end of the accounting period, usually the last day of the month. Let&#8217;s look at three separate MTO jobs, all started in the same month.<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Job A was completed and shipped by the 29th. It had $8,000 in both COGM and COGS.<\/li>\n\n\n\n<li>Job B was finished by the end of the month, on the 30th, but won&#8217;t ship until the 2nd day of the following month. It has $5,000 in COGM, but nothing registers as COGS because it still sits in finished goods inventory.<\/li>\n\n\n\n<li>Job C was only half built. Nothing finished, nothing sold and shipped. It generated $3,000 in WIP costs. Nothing is charged to either COGM or COGS.<\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">The resulting calculations are $13,000 in COGM and $8,000 in COGS in the same month, as long as nothing else came off the finished goods inventory. They&#8217;re $5,000 apart!<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">So how do you know what each job costs? The examples above assumed the costs. <a href=\"https:\/\/www.mrpeasy.com\/blog\/job-costing\/\" target=\"_blank\" rel=\"noreferrer noopener\">Job co<\/a>sting is how you determine the actual values. Every raw material item or preassembled component used, every direct labor hour on the job, and its share of related factory overhead are tagged to a specific job. This is how an MTO shop knows what costs to apply to each job it does. <strong>During manufacturing, the costs are recorded in WIP. When finished, it&#8217;s the COGM until the job ships, after which it becomes COGS.<\/strong><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Manufacturing_COGS_calculation_a_practical_example\"><\/span><strong>Manufacturing COGS calculation: a practical example<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">To determine COGS but also COGM accurately, you need to know the beginning and ending inventory values of three layers \u2013 raw materials, work in process, and finished goods, plus the total manufacturing cost metric. Let&#8217;s go over a scenario in which all the numbers come together. <\/p>\n\n\n\n<p class=\"wp-block-paragraph\">For this example, we&#8217;re going to use a small shop that manufactures powder-coated electrical enclosures for panel builders and electrical contractors.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The situation:<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">During last month&#8217;s accounting period, a SME producing powder-coated electrical enclosures for panel builders and electrical contractors shipped about 700 enclosures. These included make-to-stock boxes as well as some make-to-order custom enclosures. It&#8217;s the same formula for both. Here are the steps they followed to calculate COGS, in order.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>Step 1: Direct materials used<\/strong><\/p>\n\n\n\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\">\n<p class=\"has-medium-font-size wp-block-paragraph\"><strong>Direct material used = Beginning raw materials + purchases \u2212 ending raw materials<\/strong><\/p>\n<\/blockquote>\n\n\n\n<p class=\"wp-block-paragraph\">$18,000 + $42,000 \u2212 $20,000 = $40,000<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">(Materials: sheet steel, hinges, latches, gaskets, powder coat, and their freight cost)<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>Step 2: <a href=\"https:\/\/www.mrpeasy.com\/blog\/total-manufacturing-cost\/\">Total manufacturing cost<\/a><\/strong><\/p>\n\n\n\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\">\n<p class=\"has-medium-font-size wp-block-paragraph\"><strong>Total manufacturing cost = Direct materials + direct labor + factory overhead <\/strong><\/p>\n<\/blockquote>\n\n\n\n<p class=\"wp-block-paragraph\">$40,000 + $26,000 + $14,000 = $80,000<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">(Labor: four fabricators and assemblers, including payroll taxes and benefits. Overhead: the shop&#8217;s share of rent and power, laser and press brake depreciation, powder-coat oven gas, and consumables.)<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>Step 3: Cost of goods manufactured (COGM)<\/strong><\/p>\n\n\n\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\">\n<p class=\"has-medium-font-size wp-block-paragraph\"><strong>COGM = Beginning WIP + Total manufacturing cost \u2212 Ending WIP<\/strong> <\/p>\n<\/blockquote>\n\n\n\n<p class=\"wp-block-paragraph\">$6,000 + $80,000 \u2212 $9,000 = $77,000<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>Step 4: Cost of goods sold (COGS)<\/strong><\/p>\n\n\n\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\">\n<p class=\"has-medium-font-size wp-block-paragraph\"><strong>COGS = Beginning finished goods + COGM \u2212 Ending finished goods<\/strong><\/p>\n<\/blockquote>\n\n\n\n<p class=\"wp-block-paragraph\">$12,000 + $77,000 \u2212 $15,000 = $74,000<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The boxes sold for an <a href=\"https:\/\/www.mrpeasy.com\/blog\/selling-price\/\">average price<\/a> of about $169 each for a total revenue of $118,000. With this, they calculate gross profit by subtracting COGS from revenue: $118,000 \u2013 $74,000 = $44,000.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">This calculates to a gross profit margin of about 37%. <\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The COGS formula is simple. The accuracy comes from the counts behind each number.<\/p>\n\n\n<div class=\"banner-v1\">\n    <div class=\"banner__text\">\n        <div class=\"banner-v1__title\">Know your GOGS in real time<\/div>\n        <div class=\"banner-v1__desc\">MRPeasy tracks your stock lots, production processes, order flows, and costs, in one easy to use, real-time interface.<\/div>\n        <div><a class=\"banner-v1__link\" href=\"https:\/\/www.mrpeasy.com\/sign-up\/\" target=\"_blank\" data-ga-event=\"blog_signup_banner_white\">Try for free<\/a><\/div>\n    <\/div>\n    <div class=\"banner__img\">\n        <img decoding=\"async\" src=\"https:\/\/www.mrpeasy.com\/blog\/wp-content\/themes\/mrpeasy\/assets\/images\/banner.svg\" alt=\"banner\">\n    <\/div>\n<\/div>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_should_and_shouldnt_be_included_in_COGS_for_manufacturers\"><\/span><strong>What should and shouldn&#8217;t be included in COGS for manufacturers?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">Not every cost or expense belongs in COGS calculations. Here&#8217;s a quick test for any cost generated: Does the cost exist because you made a product? Or does it exist because you run a business? If used to make a product (raw materials, direct labor, etc.), then it belongs to COGS once the product ships. If it runs your business (office rent, office staff salary, sales and marketing, etc.), then it is an operating expense (OPEX).<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>Costs that belong in COGS<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">It&#8217;s easy to leave out some details that throw off the calculations. Here are some of the items that must go into COGS.<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Raw materials<\/strong> and components at landed cost. Landed cost includes the purchase price, the inbound freight costs, and any import duties paid.<\/li>\n\n\n\n<li><strong>Direct labor costs<\/strong>. This includes production wages and the employer&#8217;s share of payroll taxes. Any plan benefits, like health insurance paid on those wages, must also be included. You need the full package.<\/li>\n\n\n\n<li><a href=\"https:\/\/www.mrpeasy.com\/blog\/manufacturing-overhead\/\" target=\"_blank\" rel=\"noreferrer noopener\"><strong>Factory <\/strong><\/a>overhead. There&#8217;s a lot to unpack here. Factory overhead includes the factory&#8217;s share of rent and utilities (water, gas, electricity), machine depreciation and maintenance, production supervisors, quality-control inspections, and consumables used in the manufacture of the products (glue, fasteners, cutting fluid, etc.).<\/li>\n\n\n\n<li><strong>Packaging that ships with the product.<\/strong> While not the product itself, any packaging materials the product is sold in, like boxes or shrink wrap, must be included in COGS calculations.<\/li>\n\n\n\n<li><strong>Normal scrap and yield loss.<\/strong> Most products or processes will have normal scrap waste. For example, the process starts with 100 pounds of material and normally produces 95 pounds of product. That waste counts toward the 100 pounds you should use in the COGS calculation.<\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">Because overhead costs include both fixed costs (rent, depreciation) and variable costs (machine power, consumables), COGS isn&#8217;t a variable-cost number. That&#8217;s another reason it can&#8217;t be used as a break-even point.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>Costs that stay out of COGS<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">There are also some costs that shouldn&#8217;t be included in COGS. They are mostly the costs involved in running the business, with a few exceptions. Here are the main ones.<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>OPEX<\/strong>, which includes office and administrative salaries, sales commissions, marketing, and office rent.<\/li>\n\n\n\n<li><strong>Storage costs<\/strong> for finished goods awaiting shipment. There is one exception here. If storage is part of production, it belongs in COGS. These are situations like special rooms and conditions for curing meat, aging cheese, or wine.<\/li>\n\n\n\n<li><strong>Abnormal waste<\/strong> doesn&#8217;t belong in COGS. This is the direct opposite of normal scrap, which is expected. Abnormal waste is unexpected. It can come from a ruined batch due to a machine breakdown or a setup error. It&#8217;s only charged to the period it happened in, not spread over the good units.<\/li>\n\n\n\n<li><strong>Loan interest and R&amp;D<\/strong> aren&#8217;t COGS items. The interest on borrowing money, even if the loan is for a production machine, sits in the interest line of the income statement. Research and development costs for new products or existing product improvement don&#8217;t count for the cost of making today&#8217;s units.<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Gray_areas_when_designating_COGS\"><\/span><strong>Gray areas when designating COGS<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">Not everything is cut-and-dried when determining COGS, particularly in small shops. There are a few things that management, including the owner, needs to discuss and agree on.<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>First, an owner who both works the floor and does managerial tasks is an accounting issue. In smaller shops, the owner might run some of the equipment during production. Floor time is direct labor and belongs in COGS. But office time is OPEX. A reasonable split needs to be determined by allocating the owner&#8217;s wages by time. It doesn&#8217;t need to be exact, just consistent.<\/li>\n\n\n\n<li>One building for both the factory and the office is another concern. Only the factory overhead belongs to COGS. The normal way to split the costs is by floor space occupied by each portion. For example, if the factory occupies 80% of the floor space, 80% of the rent goes to overhead. The 20% belongs in OPEX. Utilities can be split the same way.<\/li>\n\n\n\n<li>Planners, buyers, and maintenance crew members don&#8217;t produce anything. But they&#8217;re needed to run production. This makes them an indirect cost that belongs in COGS. On the other hand, receptionists, office housekeepers, and salespeople are non-factory indirect expenses.<\/li>\n\n\n\n<li>Outbound shipping to customers is a very gray area. It&#8217;s never part of the COGM or inventory costs. Where it shows up on the income statement is a <a href=\"https:\/\/viewpoint.pwc.com\/dt\/us\/en\/pwc\/accounting_guides\/revenue_from_contrac\/revenue_from_contrac_US\/chapter_10_principa_US\/10_4_shipping_and_hand_US.html\" target=\"_blank\" rel=\"noreferrer noopener\">policy decision<\/a> management needs to make. Some companies report it within the cost of sales. Others list it as a selling expense.<\/li>\n\n\n\n<li>Where to place engineering and design time is another decision to make. Is it part of a custom job? Then it could be COGS. But general product development is an R&amp;D expense and stays out.<\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">All the gray areas are judgment calls. But make that call once and stick with it. Waffling back and forth sends mixed signals concerning profit margins. It also matters for tax purposes.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Three_common_small_business_COGS_mistakes\"><\/span><strong>Three common small business COGS mistakes<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">Most cost of goods sold errors aren&#8217;t accounting mistakes. They&#8217;re the result of shop-floor shortcuts that skew financial decisions because of incorrect numbers.<\/p>\n\n\n\n<ol class=\"wp-block-list\">\n<li><strong>Leaving overhead out or using a stale shop rate. <\/strong>&#8220;Material cost plus hours&#8221; style quotes skip overheads altogether. This totally throws off your pricing strategy. Using a blanket factory overhead rate from last year isn&#8217;t much better, as it doesn&#8217;t account for rising utility prices or factory rent increases.<\/li>\n\n\n\n<li><strong>Using last year&#8217;s materials prices.<\/strong> If <a href=\"https:\/\/www.mrpeasy.com\/blog\/bom-management\/\" target=\"_blank\" rel=\"noreferrer noopener\">BOMs (bills <\/a>of material) and quote sheets aren&#8217;t updated with new prices continually, COGS won&#8217;t catch it until the month&#8217;s end, after the jobs are already sold with a suboptimal margin.<\/li>\n\n\n\n<li><strong>Using &#8220;guessed&#8221; counts. <\/strong>This is particularly prominent in WIP. A $1 error in ending inventory becomes a $1 error in COGS in the opposite direction. Unrecorded scrap and remakes will hide in the counts. The total may be right, but the per-product costs are off.<\/li>\n<\/ol>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"How_does_your_inventory_valuation_method_change_COGS\"><\/span><strong>How does your inventory valuation method change COGS?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">As material prices change in your procurements, your chosen&nbsp;inventory valuation method&nbsp;determines which materials are used with new jobs, and which are left in inventory, i.e., which end up in COGS vs. ending inventory. Let&#8217;s look at an example to see how the valuation method affects COGS. <\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Suppose your beginning raw materials inventory for sheet metal stood at 100 sheets on hand, purchased at $80 each. 200 more arrived at $95 each. That&#8217;s a total steel cost of $27,000. Out of those 300 sheets, 220 were used in the accounting period. Let&#8217;s assume the total cost of the steel remains unchanged regardless of the method used.<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>With the <strong>FIFO (first in, first out) <\/strong>method, the cheaper $80 material is used first, and the remaining demand is met by the $95 lot. That&#8217;s $19,400 into COGS and $7,600 left in ending inventory.<\/li>\n\n\n\n<li>In <strong>LIFO (last in, first out),<\/strong> the $95 material is used first, and 20 sheets from the $80 lot are also used.<strong> <\/strong>COGS equals $20,600, with $6,400 remaining in ending inventory.<\/li>\n\n\n\n<li>Using the <strong><a href=\"https:\/\/www.mrpeasy.com\/blog\/weighted-average-cost-wa\/\" target=\"_blank\" rel=\"noreferrer noopener\">WAC (weighted-average cost)<\/a> <\/strong>method, the purchasing prices of the two batches are averaged to $90. This makes COGS $19,800, and the ending raw material inventory $7,200.<\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">With rising prices, the FIFO method gives you the lowest COGS and the highest reported net profit. LIFO renders the highest COGS. It shows a lower taxable income, so it&#8217;s better for short-term cash flow. Weighted average lands in the middle. It smooths out price swings so COGS moves gradually. It&#8217;s likely the easiest for small shops to keep straight. Bear in mind, though, that unlike FIFO and WAC, which are allowed under both US GAAP and IFRS accounting standards, LIFO is permitted for US GAAP only.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><em><a href=\"https:\/\/www.mrpeasy.com\/blog\/inventory-valuation-methods\/\" target=\"_blank\" rel=\"noreferrer noopener\">Continue reading about inventory valuation.<\/a> <\/em><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Tips_on_increasing_COGS_accuracy_in_practice\"><\/span><strong>Tips on increasing COGS accuracy in practice<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">Increased COGS accuracy doesn&#8217;t come from using better formulas but from implementing effective routine habits. Once set up, they take minimal time to use.<\/p>\n\n\n<div class=\"banner-v2\">\n    <p class=\"banner-v2__desc\">Get a complete overview of your business with MRPeasy<\/p>\n    <a class=\"banner-v2__link\" href=\"https:\/\/www.mrpeasy.com\/sign-up\/\" target=\"_blank\" data-ga-event=\"blog_signup_banner_blue\">Try for free<\/a>\n<\/div>\n\n\n<ol class=\"wp-block-list\">\n<li><strong>Close months the same way every month. <\/strong>Don&#8217;t wait for the accountant to ask for numbers. Lock in the COGS value on a fixed day. Compare the result to both the previous month and the same month last year. This helps spot variances. One odd month could be a counting error. Three in a row indicates a trend that&#8217;s worth acting on before it shows up in net income. Bad numbers become visible when compared.<\/li>\n\n\n\n<li><strong>Count expensive items and WIP more often.<\/strong> Use <a href=\"https:\/\/www.mrpeasy.com\/blog\/inventory-cycle-counting\/\" target=\"_blank\" rel=\"noreferrer noopener\">cycle counting<\/a> for tighter inventory management. Instead of counting everything once a year, rotate through stock items. High-value raw materials should be counted weekly. Cheap hardware can be counted less often. Walk the floor at the end of the month to count WIP.<\/li>\n\n\n\n<li><strong>Record material and scrap as they move. <\/strong>For example, receive steel into stock the day it arrives, noting the actual invoice price with inbound freight included. That way, purchases and receipts match. Issue material to specific jobs. Log scrap and remakes as soon as they happen. It can be as easy as putting a scrap bin and a tally sheet next to a press brake.<\/li>\n\n\n\n<li><strong>Set an overhead rate for each work center or workstation.<\/strong> Split factory overhead by the point it&#8217;s actually used. For instance, in a metal fab shop, it could be the laser, press brake, CNC machine, and assembly benches. Divide the share by the hours the workstation runs. Doing so allows you to charge time for each station used in production. Be sure to review the rates annually or whenever there&#8217;s a price increase. Increased rent or utility charges are indicators to refigure your number.<\/li>\n<\/ol>\n\n\n\n<p class=\"wp-block-paragraph\">All four of these habits share the same requirement. <strong>Movement must be recorded when it happens! <\/strong>Accurate counts will become harder as a shop grows and spreadsheets will become harder to manage.<\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"1918\" height=\"538\" src=\"https:\/\/www.mrpeasy.com\/blog\/wp-content\/uploads\/2022\/11\/goods-shipped-report.png\" alt=\"goods shipped report\" class=\"wp-image-23289\" srcset=\"https:\/\/www.mrpeasy.com\/blog\/wp-content\/uploads\/2022\/11\/goods-shipped-report.png 1918w, https:\/\/www.mrpeasy.com\/blog\/wp-content\/uploads\/2022\/11\/goods-shipped-report-300x84.png 300w, https:\/\/www.mrpeasy.com\/blog\/wp-content\/uploads\/2022\/11\/goods-shipped-report-1024x287.png 1024w, https:\/\/www.mrpeasy.com\/blog\/wp-content\/uploads\/2022\/11\/goods-shipped-report-768x215.png 768w, https:\/\/www.mrpeasy.com\/blog\/wp-content\/uploads\/2022\/11\/goods-shipped-report-1536x431.png 1536w\" sizes=\"auto, (max-width: 1918px) 100vw, 1918px\" \/><figcaption class=\"wp-element-caption\"><strong>MRPeasy provides easy-to-grasp reports with detailed costs for customer orders and goods shipped.<\/strong><\/figcaption><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"How_does_manufacturing_software_help_with_COGS_accuracy\"><\/span><strong>How does manufacturing software help with COGS accuracy?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">When simple spreadsheets become unwieldy, it&#8217;s time to consider implementing manufacturing ERP software that has a built-in perpetual inventory system. <a href=\"https:\/\/www.mrpeasy.com\/blog\/perpetual-vs-periodic-inventory-system\/\" target=\"_blank\" rel=\"noreferrer noopener\">Perpetual inventory<\/a> updates stock quantities and values as soon as each transaction occurs, rather than periodically by hand. When a stock movement is recorded, COGS changes transaction by transaction. This shouldn&#8217;t replace cycle counts or habits. But it does enhance them.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Manufacturing <a href=\"https:\/\/www.mrpeasy.com\/inventory-management\/\" target=\"_blank\" rel=\"noreferrer noopener\">inventory management<\/a> automatically layers additional information atop inventory calculations. Materials issued, direct labor hours, and workstation overhead get captured on the production order as well. Additionally, costs move from WIP to finished goods, then to COGS, without the need for manual journal entries if accounting is built in or the software connects to accounting software like QuickBooks or Xero.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>What to look for in manufacturing software<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">Here&#8217;s a short checklist of features to look for when considering <a href=\"https:\/\/www.mrpeasy.com\/manufacturing-erp-software\/\" target=\"_blank\" rel=\"noreferrer noopener\">manufacturing ERP software<\/a>:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Actual cost is carried on each batch of stock, including inbound freight charges.<\/li>\n\n\n\n<li>Direct labor and overhead costs roll into finished goods through the production order.<\/li>\n\n\n\n<li>Overhead can be applied by workstation, not limited to using a blanket rate.<\/li>\n\n\n\n<li>COGS is automatically recorded at shipment, with cost and gross profit per order calculated.<\/li>\n<\/ul>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>How MRPeasy handles COGS<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">Here are the steps and features that <a href=\"https:\/\/mrpeasy.com\/\" target=\"_blank\" rel=\"noreferrer noopener\">MRPeasy<\/a> uses to calculate the cost of goods sold.<\/p>\n\n\n\n<ol class=\"wp-block-list\">\n<li><strong>Each lot carries its own cost.<\/strong> A purchased lot&#8217;s cost is the price paid plus any additional fees recorded, such as inbound freight costs. A manufactured lot&#8217;s cost is derived from the manufacturing order and includes the sum of materials, labor, and applied overhead. Stock picking defaults to FIFO. However, <a href=\"https:\/\/www.mrpeasy.com\/blog\/fefo-first-expired-first-out\/\">FEFO<\/a> can override it when expiry dates are enabled.<\/li>\n\n\n\n<li><strong>Every workstation may have a different hourly rate.<\/strong> The user enters the rate for each workstation in the factory. That hourly rate is the applied overhead rate and is charged for the hours spent at that station. Less accurate blanket rates can be avoided by applying specific hourly rates.<\/li>\n\n\n\n<li>With the <strong>Standard Accounting module<\/strong> enabled, an order&#8217;s cost moves from finished goods into cost of goods sold automatically when it ships. This includes make-to-stock units. MRPeasy can also be integrated with QuickBooks or Xero, where these changes carry over automatically.<\/li>\n\n\n\n<li><strong>Two generated reports show COGS<\/strong> by order. Goods Shipped shows quantity, selling price, cost, and profit for each item shipped. The cost is split into materials, applied manufacturing overhead, and labor. The second, Customer Orders, uses the same breakdown for a whole order and includes any items that weren&#8217;t manufactured. In both reports, the costs come straight from the stock lots and manufacturing orders. This helps low-margin jobs show up. The CRM&#8217;s Statistics section also includes a Customers report that provides profitability and on-time delivery metrics aggregated by customer account.<\/li>\n<\/ol>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Frequently_asked_questions_FAQ\"><\/span><strong>Frequently asked questions (FAQ) <\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<div class=\"schema-faq wp-block-yoast-faq-block\"><div class=\"schema-faq-section\" id=\"faq-question-1792496785483\"><strong class=\"schema-faq-question\">What is NOT included in COGS?<\/strong> <p class=\"schema-faq-answer\">Cost of goods sold excludes expenses that aren&#8217;t directly related to manufacturing products or don&#8217;t qualify as factory or manufacturing overhead. These typically include administrative salaries, office rent, marketing, sales commissions, and research and development costs. Abnormal production waste and finished goods storage costs are also excluded, except where storage is necessary for production. Outbound shipping may be classified as a selling expense or cost of sales, depending on the company&#8217;s accounting policy.<\/p> <\/div> <div class=\"schema-faq-section\" id=\"faq-question-1792496842763\"><strong class=\"schema-faq-question\">How often should I calculate cost of goods sold?<\/strong> <p class=\"schema-faq-answer\">Manufacturers should calculate and review COGS at least monthly, ideally as part of their regular accounting close. Businesses using perpetual inventory systems can track COGS continuously as sales are closed. Comparing monthly COGS and gross profit margins helps identify rising material costs, production inefficiencies, and inventory discrepancies before they become larger problems.<\/p> <\/div> <div class=\"schema-faq-section\" id=\"faq-question-1792496893248\"><strong class=\"schema-faq-question\">What is the difference between COGS and operating expenses?<\/strong> <p class=\"schema-faq-answer\">COGS represents the manufacturing costs associated with products sold, including direct materials, direct labor, and allocated factory overhead. Operating expenses (OPEX) cover the costs of running the business, such as administration, sales, marketing, and office expenses. COGS is deducted from revenue to calculate gross profit, while operating expenses are deducted afterward to determine operating profit.<\/p> <\/div> <div class=\"schema-faq-section\" id=\"faq-question-1792496911968\"><strong class=\"schema-faq-question\">How does inventory management affect COGS?<\/strong> <p class=\"schema-faq-answer\">Accurate inventory management ensures that material costs, work in process, and finished goods are valued correctly. Errors in stock counts, unrecorded scrap, or missing material transactions can distort COGS and reported profit margins. Inventory valuation methods such as FIFO and weighted average also affect which costs are recognized when products are sold. Regular cycle counts and timely transaction recording help keep COGS accurate.<\/p> <\/div> <div class=\"schema-faq-section\" id=\"faq-question-1792496924047\"><strong class=\"schema-faq-question\">How does manufacturing software simplify cost accounting?<\/strong> <p class=\"schema-faq-answer\">Manufacturing ERP software integrates inventory movements, production orders, labor tracking, and factory overhead into a single system. It automatically accumulates manufacturing costs in work in process and transfers them to finished goods and COGS as products are completed and sold. This reduces manual calculations, spreadsheet errors, and month-end reconciliation work. It also provides better visibility into product costs, order profitability, and gross margins.<\/p> <\/div> <\/div>\n\n\n\n<p class=\"wp-block-paragraph\"><em>You may also like: <\/em><a href=\"https:\/\/www.mrpeasy.com\/blog\/inventory-tracking\/\" target=\"_blank\" rel=\"noreferrer noopener\"><em>Inventory Tracking \u2013 An Essential Guide for SMEs<\/em><\/a><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><\/p>\n","protected":false},"excerpt":{"rendered":"<p>COGS is an important calculation used in determining whether a final price will cover production costs. But there&#8217;s often an erroneous assumption. COGS isn&#8217;t the break-even point. This article shows how to calculate it without making the common mistakes.<\/p>\n","protected":false},"author":15,"featured_media":13709,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[92],"tags":[75,3,8,4],"class_list":["post-2607","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-accounting","tag-cogs","tag-manufacturing","tag-manufacturing-planning","tag-manufacturing-software"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v28.6 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Cost of Goods Sold in Manufacturing: A Guide to Accurate COGS<\/title>\n<meta name=\"description\" content=\"The Cost of Goods Sold is among the most important financial metrics in business. What is COGS and how to calculate it? Learn more.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.mrpeasy.com\/blog\/calculating-cost-of-goods-sold-in-manufacturing\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Cost of Goods Sold in Manufacturing: A Guide to Accurate COGS\" \/>\n<meta property=\"og:description\" content=\"The Cost of Goods Sold is among the most important financial metrics in business. What is COGS and how to calculate it? 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COGS is deducted from revenue to calculate gross profit, while operating expenses are deducted afterward to determine operating profit.","inLanguage":"en-US"},"inLanguage":"en-US"},{"@type":"Question","@id":"https:\/\/www.mrpeasy.com\/blog\/calculating-cost-of-goods-sold-in-manufacturing\/#faq-question-1792496911968","position":4,"url":"https:\/\/www.mrpeasy.com\/blog\/calculating-cost-of-goods-sold-in-manufacturing\/#faq-question-1792496911968","name":"How does inventory management affect COGS?","answerCount":1,"acceptedAnswer":{"@type":"Answer","text":"Accurate inventory management ensures that material costs, work in process, and finished goods are valued correctly. Errors in stock counts, unrecorded scrap, or missing material transactions can distort COGS and reported profit margins. Inventory valuation methods such as FIFO and weighted average also affect which costs are recognized when products are sold. Regular cycle counts and timely transaction recording help keep COGS accurate.","inLanguage":"en-US"},"inLanguage":"en-US"},{"@type":"Question","@id":"https:\/\/www.mrpeasy.com\/blog\/calculating-cost-of-goods-sold-in-manufacturing\/#faq-question-1792496924047","position":5,"url":"https:\/\/www.mrpeasy.com\/blog\/calculating-cost-of-goods-sold-in-manufacturing\/#faq-question-1792496924047","name":"How does manufacturing software simplify cost accounting?","answerCount":1,"acceptedAnswer":{"@type":"Answer","text":"Manufacturing ERP software integrates inventory movements, production orders, labor tracking, and factory overhead into a single system. It automatically accumulates manufacturing costs in work in process and transfers them to finished goods and COGS as products are completed and sold. This reduces manual calculations, spreadsheet errors, and month-end reconciliation work. It also provides better visibility into product costs, order profitability, and gross margins.","inLanguage":"en-US"},"inLanguage":"en-US"}]}},"_links":{"self":[{"href":"https:\/\/www.mrpeasy.com\/blog\/wp-json\/wp\/v2\/posts\/2607","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.mrpeasy.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.mrpeasy.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.mrpeasy.com\/blog\/wp-json\/wp\/v2\/users\/15"}],"replies":[{"embeddable":true,"href":"https:\/\/www.mrpeasy.com\/blog\/wp-json\/wp\/v2\/comments?post=2607"}],"version-history":[{"count":53,"href":"https:\/\/www.mrpeasy.com\/blog\/wp-json\/wp\/v2\/posts\/2607\/revisions"}],"predecessor-version":[{"id":23338,"href":"https:\/\/www.mrpeasy.com\/blog\/wp-json\/wp\/v2\/posts\/2607\/revisions\/23338"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.mrpeasy.com\/blog\/wp-json\/wp\/v2\/media\/13709"}],"wp:attachment":[{"href":"https:\/\/www.mrpeasy.com\/blog\/wp-json\/wp\/v2\/media?parent=2607"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.mrpeasy.com\/blog\/wp-json\/wp\/v2\/categories?post=2607"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.mrpeasy.com\/blog\/wp-json\/wp\/v2\/tags?post=2607"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}