Cost of goods manufactured is one of the key subordinate calculations in
determining the total cost of goods sold for a manufacturing company.
The standard equation for calculating the cost of goods manufactured is simple:
More complicated is the tracking and assignment of those costs.
One of the standard accounting methods for accurate assignment is the use of a cost of goods manufactured schedule. There are three major cost centers that are included in the schedule:
Direct Materials Used
Four numbers are critical to calculation of cost of goods manufactured and they rely on sound materials management systems to have an accurate starting point. These are:
Direct Labor Used
This is perhaps the easiest to track. Standard accounting practices and payroll records ensure that this is a simple to acquire number. However, this should include not only direct wages paid but the cost of benefits associated with the workforce involved in production.
Indirect Costs/Manufacturing Overhead
This can be the most challenging information to collect. The parallel costs to the direct cost include:
Other overhead costs include:
With these values available, the bottom line solution is a simple case of addition and subtraction. The next step is calculating the cost of goods sold. This interim step is valuable for decision making regarding cost management strategies, but it is cost of goods sold that drives bottom line performance and long term production decisions.
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