Difference between COGS and COGM

Because most managers do not have access to the detailed accounting records, they need to have the flow of costs and the calculation of important income statement amounts presented in a formalized manner. Therefore, a schedule of cost of goods manufactured (CGM) is prepared as a preliminary step to the determination of cost of goods sold (CGS).

CGM is the total production cost of the goods that were completed and transferred to Finished Goods Inventory during the period. This amount is similar to the cost of net purchases in the cost of goods sold schedule for a retailer. The schedule of cost of goods manufactured starts with the beginning balance of Work in Process (WIP) Inventory and details all product cost components. The cost of materials used in production during the period is equal to the beginning balance of Raw Materials Inventory plus raw materials purchased minus the ending balance of Raw Materials Inventory. If Raw Materials Inventory includes both direct and indirect materials, the cost of direct material used is assigned to WIP Inventory and the cost of indirect materials used is included in variable overhead.

Because direct labor cannot be warehoused, all charges for direct labor during the period are part of WIP Inventory. Variable and fixed overhead costs are added to direct material and direct labor costs to determine total manufacturing costs. Beginning Work in Process Inventory cost is added to total current period manufacturing costs to obtain a subtotal amount that can be referred to as “total costs to account for.” The value of ending WIP Inventory is calculated (through techniques discussed later in the text) and subtracted from the subtotal to provide the cost of goods manufactured during the period. The schedule of cost of goods manufactured is usually prepared only as an internal schedule and is not provided to external parties. In the schedule of cost of goods sold, cost of goods manufactured is added to the beginning balance of Finished Goods (FG) Inventory to find the cost of goods available for sale during the period.