Cost of Goods Manufactured

Definition

The cost of goods manufactured (COGM) refers to the total cost of producing finished goods during a specific accounting period in a manufacturing organization. It represents the sum of direct materials, direct labor, and manufacturing overhead incurred in the production process.

5 Must Know Facts For Your Next Test

1. The cost of goods manufactured is a key component in determining the cost of goods sold (COGS) for a manufacturing company.
2. COGM is used to calculate the total cost of production, which is then allocated to the cost of goods sold and the cost of ending inventory.
3. In a job order costing system, the COGM is the total cost of all the jobs completed and transferred to the finished goods inventory during an accounting period.
4. Equivalent units are used to calculate the total cost of production in a process costing system, where the COGM represents the cost of producing the equivalent units.
5. Accurate calculation of COGM is essential for determining the profitability of a manufacturing organization and making informed pricing decisions.

Review Questions

• Explain how the cost of goods manufactured (COGM) is calculated and its importance in a manufacturing organization.
  • The cost of goods manufactured (COGM) is calculated by adding the direct materials, direct labor, and manufacturing overhead costs incurred during the production process. This metric is crucial for manufacturing organizations as it provides the total cost of producing finished goods, which is then used to determine the cost of goods sold (COGS) and the value of ending inventory. Accurate COGM calculation is essential for understanding the profitability of the business, making informed pricing decisions, and effectively managing the production process.
• Describe the role of COGM in a job order costing system and how it is used to trace the flow of product costs through the inventory accounts.
  • In a job order costing system, the cost of goods manufactured (COGM) represents the total cost of all the jobs completed and transferred to the finished goods inventory during an accounting period. The COGM is used to trace the flow of product costs through the inventory accounts, starting from the direct materials, direct labor, and manufacturing overhead incurred in the production process, and then moving the costs from the work-in-process inventory to the finished goods inventory. This information is crucial for understanding the total cost of production and the profitability of individual jobs or orders.
• Explain the concept of equivalent units and how it is used to calculate the total cost of production and the COGM in a process costing system.
  • In a process costing system, the concept of equivalent units is used to determine the COGM. Equivalent units represent the amount of work done on incomplete units, expressed in terms of fully completed units. By calculating the equivalent units of production, the total cost of production can be determined and then divided by the equivalent units to arrive at the cost per equivalent unit. This cost per equivalent unit is then used to value the finished goods inventory and the cost of goods sold, providing a more accurate representation of the COGM in a process costing environment where products are mass-produced.

Related terms

Direct Materials: The raw materials that can be directly traced to the production of a specific product.

Direct Labor: The labor costs that can be directly attributed to the production of a specific product.

Manufacturing Overhead: The indirect costs associated with the production process, such as factory rent, utilities, and indirect labor.