Cost of Goods Sold vs. Cost of Goods Manufactured: What's the Difference?

Cost of Goods Sold (COGS) and Cost of Goods Manufactured (COGM) are two important accounting concepts for businesses that produce or sell physical goods. While they are related, there is a key difference between the two.

As mentioned in our previous blog Cost of Goods Sold: Only for Inventory-Based Businesses, COGS (Income Statement line item) comes from Inventory-on-hand (Balance Sheet line item) and typically it simply is the wholesale cost of the merchandise or inventory that was sold to customers. It includes the cost of direct materials, direct labor, and overhead costs. COGS is deducted from revenue to calculate gross profit, which is a key measure of profitability.

COGM is the total cost of producing all finished goods during a given period. COGM then becomes part of the Inventory-on-hand (Balance Sheet Item) dollar amount. A COGM report is an internal management report. It is not part of the external financial statements presented to the public, investors, banks, and other external stakeholders. However, COGM is used to calculate the ending balance of inventory on the balance sheet.

 

Here is the formula to calculate Ending Inventory (On Balance Sheet):


BEGINNING INVENTORY (which may include some previously remaining COGM not sold)

+

INVENTORY PURCHASES or INVENTORY MANUFACTURED (if you happen to manufacture your own inventory)

-

COST OF GOODS SOLD (plus shrinkage, if any)

= 

ENDING INVENTORY (which may include some currently remaining COGM not sold)


NOTE A: Cost of Goods Sold should simply be Inventory at cost that was sold; the inventory cost may simply be the cost of inventory from a wholesaler or the inventory cost may be packed with direct materials, direct labor, and overhead costs.

Here is a table that summarizes the key differences between COGS and COGM taking into consideration Note A above:

Characteristic

COGS

COGM

Definition

The total cost of producing or acquiring the goods that were sold during a given period.

The total cost of producing all finished goods during a given period (including finished goods not sold).

Components

Inventory Cost or Direct materials, direct labor, and overhead costs related to inventory sold.

Cost of Direct materials, direct labor, overhead costs, including the cost of finished goods that are still in inventory.

Purpose

To calculate gross profit.

To calculate the ending balance of finished goods inventory.

Example:

Let's say a manufacturing company produces 100 widgets during a given period. The company sells 80 of the widgets and keeps 20 widgets in inventory. The company's COGS for the period would be the cost of producing the 80 widgets that were sold. The company's COGM for the period would be the cost of producing all 100 widgets; its ending inventory would be the 20 widgets that are still in inventory assuming zero widgets in beginning inventory.

Which metric is more important?

Both COGS and COGM are important metrics for businesses to track. COGS is more important for tracking profitability, while COGM is more important for managing inventory levels.

Businesses should use both metrics to make informed decisions about their operations. For example, a business can use COGS to track how its profitability is changing over time. A business can use COGM to identify opportunities to reduce costs or improve production efficiency.

Conclusion

COGS and COGM are two important accounting concepts for businesses that produce or sell physical goods. COGS is used to calculate gross profit, while COGM is used to calculate the ending balance of finished goods inventory. Businesses should use both metrics to make informed decisions about their operations.

For further discussion on this topic and more visit us online at https://www.sve-accountingandtaxes.com/make-appointment/


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