Cost of Goods Manufactured vs. Cost of Goods Sold! Why This Distinction Matters

Why This Distinction Matters

If you’re working in manufacturing or inventory-based accounting, understanding the difference between Cost of Goods Manufactured (COGM) and Cost of Goods Sold (COGS) is essential. These two metrics are closely related—but they serve different purposes and appear in different places on the income statement.

Confusing them can lead to inaccurate reporting, poor decision-making, and missed opportunities to improve profitability.

Definition and Formula for COGM

Cost of Goods Manufactured (COGM) represents the total production cost of goods completed during a specific period. It includes:

• Direct materials used
• Direct labor
• Manufacturing overhead
• Adjustments for beginning and ending work-in-process inventory

COGM Formula:

COGM = Direct Materials Used + Direct Labor + Manufacturing Overhead + Beginning WIP Inventory - Ending WIP Inventory

COGM is used to calculate COGS and gives insight into production efficiency.

Definition and Formula for COGS

Cost of Goods Sold (COGS) is the cost of inventory that was actually sold during the period. It includes:

• Beginning finished goods inventory
• COGM
• Ending finished goods inventory

COGS Formula:

COGS = Beginning Finished Goods Inventory + COGM - Ending Finished Goods Inventory

COGS appears on the income statement and directly affects gross profit.

How They Connect in the Income Statement

Here’s how it flows:

1. COGM is calculated first to determine the total cost of goods completed.
2. That value feeds into the COGS calculation, which reflects the cost of goods sold.
3. COGS is then subtracted from revenue to determine gross profit.

Understanding this flow helps accountants and business owners track production costs, manage inventory, and analyze profitability.