{"id":30481,"date":"2024-08-16T15:55:26","date_gmt":"2024-08-16T19:55:26","guid":{"rendered":"https:\/\/www.method.me\/?p=30481"},"modified":"2026-05-21T14:27:03","modified_gmt":"2026-05-21T18:27:03","slug":"manufacturing-cogs","status":"publish","type":"post","link":"https:\/\/www.method.me\/blog\/manufacturing-cogs\/","title":{"rendered":"Manufacturing COGS: Everything you need to know"},"content":{"rendered":"\n<p class=\"wp-block-paragraph\">If you can\u2019t track what it costs to make your products, protecting your margins becomes guesswork. COGS, or the cost of goods sold, goes beyond a standard financial metric: it shapes pricing decisions, production efficiency, and inventory strategy. Get it wrong and profitability suffers; get it right and you have a clear picture of how your operations perform. This guide covers what <a href=\"https:\/\/www.method.me\/industries\/manufacturing-crm-software\/\">manufacturing <\/a>COGS is, why it matters, and how to calculate it accurately.<\/p>\n\n\n\n<div class=\"wp-block-group has-background is-layout-flow wp-block-group-is-layout-flow\" style=\"background-color:#EBF5FC;border-radius:8px;border-left:4px solid #0170B9;padding-top:20px;padding-bottom:20px;padding-left:24px;padding-right:24px;\"><div class=\"wp-block-group__inner-container\">\n\n\n<p class=\"wp-block-paragraph\" style=\"font-weight:700;font-size:14px;letter-spacing:2px;color:#0170B9;\">TL;DR<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>COGS, or cost of goods sold, measures the direct costs of producing the goods you sell, including raw materials and direct labor.<\/li>\n<li>Knowing your COGS is essential for setting competitive prices, managing inventory, and filing taxes accurately.<\/li>\n<li>The basic COGS formula is: Beginning inventory + Purchases minus Ending inventory.<\/li>\n<li>COGM (cost of goods manufactured) and COGS are related but distinct; COGM covers production costs for a period, while COGS reflects only what was actually sold.<\/li>\n<li>Your choice of inventory valuation method (FIFO, LIFO, or average cost) affects how COGS appears on your financial statements and impacts reported profit margins.<\/li>\n<\/ul>\n\n\n<\/div><\/div>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-what-is-cost-of-goods-sold\">What is cost of goods sold?<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">COGS (cost of goods sold) represents the direct total costs incurred when producing goods. This includes the cost of materials used to create the product and the direct labor costs involved in production.&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">COGS is a crucial metric for most businesses as it directly impacts profitability and is essential for financial reporting and tax purposes.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-why-is-the-cost-of-goods-sold-in-manufacturing-important\">Why is the cost of goods sold in manufacturing important?<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">COGS is vital in manufacturing as it directly impacts your:&nbsp;<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li class=\"\">Profitability.<\/li>\n\n\n\n<li class=\"\">Pricing.\u00a0<\/li>\n\n\n\n<li class=\"\">Tax compliance.\u00a0<\/li>\n\n\n\n<li class=\"\">Inventory management.\u00a0<\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">By subtracting COGS from revenue, you can determine your gross profit, a key indicator of your business\u2019 financial health. As a result, you can set the most competitive prices to ensure optimal profitability.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Also, COGS plays a crucial role in inventory management. By analyzing COGS in relation to your inventory levels, you can improve inventory turnover and efficiency to reduce your carrying costs and boost cash flow.&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Not to mention, accurate COGS calculations are essential for tax reporting and optimizing deductions.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-basic-cogs-formula\">Basic COGS formula<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">The basic formula for calculating COGS is:<\/p>\n\n\n\n<p class=\"has-text-align-center wp-block-paragraph\"><em>COGS = Beginning inventory + Purchases \u2013 Ending inventory<\/em><\/p>\n\n\n\n<p class=\"wp-block-paragraph\">This formula is most effective when inventory constitutes the majority of your COGS. For service-based businesses or those with high labor needs, calculating the cost may require you to include additional factors.<\/p>\n\n\n\n<div class=\"wp-block-group m-section-thin m-bluebanner is-layout-constrained wp-block-group-is-layout-constrained\"><div class=\"wp-block-group__inner-container\">\n<h3 class=\"wp-block-heading has-text-align-center simpletoc-hidden\" id=\"h-see-how-method-makes-running-your-business-easier\">See how Method makes running your business easier.<\/h3>\n\n\n\n<div class=\"wp-block-buttons is-content-justification-center is-layout-flex wp-container-core-buttons-is-layout-3e41869c wp-block-buttons-is-layout-flex\">\n<div class=\"wp-block-button m-button cta-content banner-cta4\"><a class=\"wp-block-button__link wp-element-button\" href=\"https:\/\/grow.method.me\/request-demo\/?source=content\">Take me there<\/a><\/div>\n<\/div>\n<\/div><\/div>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-drivers-for-cost-of-goods-sold\">Drivers for cost of goods sold<\/h2>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-materials-costing\">Materials costing<\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">Materials costing includes the cost of raw materials used in production. This encompasses:<\/p>\n\n\n\n<ol class=\"wp-block-list\">\n<li class=\"\">Direct materials: Primary components used in the product.<\/li>\n\n\n\n<li class=\"\">Indirect materials: Supplies used in production but not directly part of the final product.<\/li>\n<\/ol>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-operations-costing\">Operations costing<\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">Operations costing involves two main categories:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li class=\"\">Direct labor: Wages of workers directly involved in production.<\/li>\n\n\n\n<li class=\"\">Manufacturing overhead: Indirect costs such as factory rent, utilities, and depreciation of equipment.<\/li>\n<\/ul>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-inventory-valuation\">Inventory valuation<\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">Inventory valuation methods can significantly impact your COGS calculations. Common methods include:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li class=\"\">FIFO (First-In, First-Out): Assumes oldest inventory is sold first.<\/li>\n\n\n\n<li class=\"\">LIFO (Last-In, First-Out): Assumes newest inventory is sold first.<\/li>\n\n\n\n<li class=\"\">Average cost: Uses your average inventory cost across all items.<\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">Note that your method of choice affects your reported COGS and, consequently, profit margins.&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-what-is-cogm\">What is COGM?<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">Cost of goods manufactured (COGM) represents the total cost of manufacturing products and transferring them into finished goods inventory. It includes:&nbsp;<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li class=\"\">Direct material cost.<\/li>\n\n\n\n<li class=\"\">All labor expenses.<\/li>\n\n\n\n<li class=\"\">Manufacturing overhead costs.<\/li>\n<\/ul>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-cogm-vs-cogs\">COGM vs. COGS<\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">While related, COGM and COGS are distinct. COGM is used to calculate your ending work-in-process (WIP) inventory and is an input for determining COGS.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The biggest difference between them is that:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li class=\"\">COGM focuses on production costs for a specific period.<\/li>\n\n\n\n<li class=\"\">COGS represents the cost of goods actually sold during that period.<\/li>\n<\/ul>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-total-manufacturing-cost-tmc-and-its-differences\">Total manufacturing cost (TMC) and its differences<\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">Like COGM, your <a href=\"https:\/\/www.method.me\/blog\/total-manufacturing-cost-formula\/\">total manufacturing cost (TMC)<\/a> includes all costs associated with production. The key difference between TMC and COGM is that TMC doesn\u2019t account for changes in work-in-process inventory.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-how-to-calculate-the-cost-of-goods-manufactured\">How to calculate the cost of goods manufactured<\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">The COGM calculation is typically used for a specific accounting period, such as a month or a year. Its basic formula is:<\/p>\n\n\n\n<p class=\"has-text-align-center wp-block-paragraph\"><em>Beginning WIP (work-in-process) inventory + Total manufacturing costs \u2013 Ending WIP inventory<\/em><\/p>\n\n\n\n<p class=\"wp-block-paragraph\">You can break this out a little further with this formula:<\/p>\n\n\n\n<p class=\"has-text-align-center wp-block-paragraph\"><em>Beginning WIP inventory + Direct materials + Direct labor + Manufacturing overhead \u2013 Ending WIP Inventory<\/em><\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Your beginning inventory represents your total cost value of work-in-process (WIP) inventory at the start of the accounting period.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">If you don\u2019t have an ending inventory, it means all products started during the period were completed, and your ending WIP inventory would be zero. If you\u2019re calculating COGM with an unknown ending inventory, you can estimate your historical percentage and apply that to your starting inventory.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-example-calculation-of-cost-of-goods-manufactured-cogm\">Example calculation of cost of goods manufactured (COGM)<\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">Let\u2019s consider a furniture manufacturer with the following data:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li class=\"\">Beginning WIP inventory: $10,000<\/li>\n\n\n\n<li class=\"\">Direct materials: $100,000<\/li>\n\n\n\n<li class=\"\">Direct labor: $50,000<\/li>\n\n\n\n<li class=\"\">Manufacturing overhead: $60,000<\/li>\n\n\n\n<li class=\"\">Ending WIP inventory: $30,000<\/li>\n<\/ul>\n\n\n\n<p class=\"has-text-align-center wp-block-paragraph\"><em>COGM = $10,000 + $100,000 + $50,000 + $60,000 \u2013 $30,000&nbsp;<\/em><\/p>\n\n\n\n<p class=\"wp-block-paragraph\">So, for this example, the manufacturer\u2019s COGM would be $190,000.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-linking-cogm-to-cogs\">Linking COGM to COGS<\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">Once you\u2019ve calculated your COGM, you can incorporate it into your finished goods inventory metric. Here\u2019s the formula to calculate COGS using COGM:<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><em>COGS = Beginning finished goods inventory + COGM \u2013 Ending finished goods inventory<\/em><\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Your manufacturing COGS is much easier to calculate once you have your COGM, and it decreases the risk of oversight. Breaking down your COGS calculation into smaller parts is a smart way to ensure that your costs and inventory accounted are accurate.<\/p>\n\n\n\n<div class=\"wp-block-group m-section-thin m-bluebanner is-layout-constrained wp-block-group-is-layout-constrained\"><div class=\"wp-block-group__inner-container\">\n<h3 class=\"wp-block-heading has-text-align-center simpletoc-hidden\" id=\"h-get-time-back-to-focus-on-growth-with-method\">Get time back to focus on growth with Method.<\/h3>\n\n\n\n<div class=\"wp-block-buttons is-content-justification-center is-layout-flex wp-container-core-buttons-is-layout-3e41869c wp-block-buttons-is-layout-flex\">\n<div class=\"wp-block-button m-button cta-content\"><a class=\"wp-block-button__link wp-element-button\" href=\"https:\/\/signup.method.me\/methodcrm\">Try for free<\/a><\/div>\n<\/div>\n<\/div><\/div>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-how-to-avoid-challenges-in-calculating-cost-of-goods-sold\">How to avoid challenges in calculating cost of goods sold<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">Here are five ways to avoid challenges when calculating manufacturing COGS:<\/p>\n\n\n\n<ol class=\"wp-block-list\">\n<li class=\"\">Maintain accurate inventory records through automatic and manual checks.<\/li>\n\n\n\n<li class=\"\">Consistently apply inventory valuation methods across all manufacturing processes.<\/li>\n\n\n\n<li class=\"\">Regularly reconcile inventory counts with financial records.<\/li>\n\n\n\n<li class=\"\">Use appropriate accounting software for tracking costs, like <a href=\"https:\/\/www.method.me\/quickbooks-crm\/\">QuickBooks<\/a>.<\/li>\n\n\n\n<li class=\"\">Stay informed about industry-specific accounting standards.<\/li>\n<\/ol>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-key-takeaways\">Key takeaways<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">Overall, a thorough understanding of cost of goods sold (COGS) and its calculation is essential for manufacturers to make informed pricing decisions and drive overall business success.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Remember that:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li class=\"\">The basic COGS formula is: Beginning inventory + Purchases \u2013 Ending inventory.<\/li>\n\n\n\n<li class=\"\">COGM focuses on production costs, while COGS represents the cost of goods sold.<\/li>\n\n\n\n<li class=\"\">Accurate inventory valuation and cost tracking are essential for correct COGS calculations.<\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">Tracking COGS is only the first step. Once you know your costs, it\u2019s time to understand how those costs of producing generate profits over time.&nbsp;<\/p>\n\n\n\n<p class=\"has-text-align-center wp-block-paragraph\"><a href=\"https:\/\/grow.method.me\/request-demo\/?source=content\">See how<\/a> <a href=\"https:\/\/www.method.me\/\">Method<\/a> gives you key insights into your manufacturing business in real time.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-manufacturing-cogs-faqs\">Manufacturing COGS FAQs<\/h2>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-does-cogs-include-the-cost-of-goods-manufactured\">Does COGS include the cost of goods manufactured?<\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">Yes, COGS includes the cost of goods manufactured for products that were sold during the chosen period.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-how-can-i-track-my-cogs\">How can I track my COGS?<\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">To track COGS, you should implement an effective inventory management system that accurately records purchases, production costs, and inventory levels throughout the accounting period.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-is-cogs-considered-an-expense\">Is COGS considered an expense?<\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">Yes, COGS is considered an expense on your income statement. It\u2019s subtracted from revenue to calculate gross profit.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Explore the essentials of manufacturing COGS, including how to calculate it, the ways it informs profitability, and its relationship to COGM.<\/p>\n","protected":false},"author":65,"featured_media":30482,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"inline_featured_image":false,"site-sidebar-layout":"default","site-content-layout":"","ast-site-content-layout":"default","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","ast-disable-related-posts":"","theme-transparent-header-meta":"","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"set","ast-page-background-enabled":"default","ast-page-background-meta":{"desktop":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"ast-content-background-meta":{"desktop":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"footnotes":""},"categories":[228],"tags":[138],"class_list":["post-30481","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-manufacturing","tag-manufacturing"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v27.5 (Yoast SEO v27.5) - https:\/\/yoast.com\/product\/yoast-seo-premium-wordpress\/ -->\n<title>Manufacturing COGS: Everything You Need to Know &#8212; 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