For manufacturing companies, profitability lives and dies in the production line. The single most important window into that production reality is Cost of Goods Manufactured (COGM)—the all-in cost to convert materials, labor, and overhead into finished goods during a period. Treat COGM like a static report and you’ll miss where profit is leaking. Treat it like a management system and you’ll control costs, protect margins, and scale with confidence.
This CFO-focused playbook shows how to calculate COGM correctly, read what it’s telling you, and act on it with operational discipline so gross margin and cash flow improve together.
COGM measures the total production cost of goods completed in the period. It sits between Work-in-Process (WIP) and Finished Goods and ultimately feeds Cost of Goods Sold on the income statement. If COGM is wrong, your gross margin is wrong. If your gross margin is wrong, every pricing, staffing, and investment decision is suspect.
CFOs keep COGM connected to downstream reporting by aligning it with how to determine cost of goods sold (COGS) in manufacturing and upstream with operational controls inside a financial management control process for manufacturers. That link prevents accounting from drifting away from the factory floor.
COGM includes:
Direct materials used
Direct labor
Manufacturing overhead
Beginning and ending WIP
COGM excludes sales, G&A, and distribution. Those sit below the gross margin line.
COGM = Beginning WIP + Total Manufacturing Costs – Ending WIP
Total Manufacturing Costs = Direct Materials Used + Direct Labor + Manufacturing Overhead
Break each piece down into levers you can manage.
| Component | Definition | What the CFO Watches |
|---|---|---|
| Direct Materials Used | Raw inputs consumed | Purchase price variance, scrap, yield |
| Direct Labor | Hands-on production labor | Overtime, learning curve, utilization |
| Manufacturing Overhead | Indirect factory costs | Maintenance, utilities, depreciation |
| WIP | Costs in unfinished goods | Flow, bottlenecks, schedule adherence |
Accrual accuracy matters. Tie your monthly close to complete accrual accounting for manufacturers so WIP and overhead capitalization are consistent and audit-ready.
Three reasons:
It determines your unit economics and product line viability.
It drives gross margin, which sets the ceiling for operating profit.
It pressures cash conversion through inventory build and lead times.
To keep the income statement honest, pair COGM surveillance with routine margin analysis in manufacturing. Margin analysis highlights whether COGM movements are driven by price, mix, volume, or cost inputs.
Confusing fixed and variable costs is the fastest way to break COGM. Revisit fixed vs. variable costs and map every line item:
Variable: raw materials, piece-rate labor, consumables, freight.
Fixed: salaried supervision, depreciation, leases, base utilities.
Why it matters: variable cost set your contribution margin; fixed cost are spread across volume. Under-utilization pushes per-unit overhead up and drags contribution down. If price hasn’t moved but COGM per unit creeps up, utilization or waste is the culprit. Tie the finance view to the operating lens using contribution margin explained.
COGS = Beginning Finished Goods + COGM – Ending Finished Goods.
If COGM rises without a pricing response, gross margin compresses. Use monthly variance analysis: price variance, mix variance, material usage variance, labor efficiency variance, and overhead volume variance. Read results alongside your profit and loss statement so production and accounting narratives match.
Build a small, stable dashboard from financial KPIs:
Material usage variance %
Purchase price variance %
Labor efficiency variance %
OEE or run-time utilization
Scrap/rework rate %
Overhead absorption rate
COGM per standard hour
Inventory turns and days in WIP
Keep targets visible at the cell or line level. If operators can’t see the metric, they can’t move it.
Capacity changes COGM even when material and labor rates stand still. Higher throughput spreads fixed overhead across more units, lowering per-unit COGM. But the wrong mix can erase that gain. Blend your scheduling with capacity and production planning so lines run the products with the strongest contribution per constraint hour.
When in doubt, re-rank SKUs by contribution/hour using the logic in finding break even point to scale profitably.
Excess WIP ties up cash and inflates overhead allocation. Optimize batch sizes, reduce changeover time, and synchronize supply with takt. Pair production tactics with finance oversight from improve inventory efficiency through cost optimization. Fewer touches. Faster flow. Lower COGM.
COGM falls apart with manual spreadsheets. Automate data capture and posting. Use integrated platforms that connect purchasing, production orders, labor capture, and GL. Guidance from ERP system selection for manufacturing companies and how accounting automation improves manufacturing finance will keep your item masters, BOMs, routings, and cost rolls consistent.
Close process must include:
WIP aging review
Overhead absorption check
Manufacturing variances reconciliation
Standard cost update cadence
Lock those into your financial management control process so the factory and GL never drift.
Use this sequence monthly:
Start at Gross Margin. If down, is it price, mix, volume, or cost?
Material: check purchase price variance, usage variance, scrap. If swings persist, revisit supplier terms or BOM accuracy and lean projects from optimize price and cost analysis in manufacturing supply chain.
Labor: compare earned hours to actual hours. Overtime spike? Skill mismatch? Fix with training and line balancing.
Overhead: maintenance backlog or run-time too low? Consider repair vs. replace and automation ROI using streamlining the financial planning process for equipment upgrades.
WIP: if growing faster than shipments, you’re overproducing or blocked. Attack constraints; shrink batch sizes.
Document root causes and assign owners. The loop closes only when the next month’s COGM per unit falls.
Never price on “market” alone. Price against contribution and the reality of COGM. Use margin analysis in manufacturing to pressure-test discount requests. A 10% discount on a 30% contribution SKU can kill half your profit if variable cost is high. Train sales on contribution logic so discounts align with capacity utilization and not just volume.
Past COGM is a scorecard. Future COGM is a plan. Blend sales demand, lead times, staffing, and maintenance windows into a rolling view. For structure, apply manufacturing financial forecasting and capital purchase plans and link to FP&A cycles outlined in what is FP&A and why every growing company needs it. Forecast at the routing step or standard hour level, not just dollars, so you can adjust schedules before the month is lost.
COGM is a frequent audit focal point because it touches capitalization, inventory valuation, and margin. Keep policies documented, overhead pools defined, and cost-roll change approvals logged. The cadence and evidence style should align with a strong financial auditing process in manufacturing accounting. Clean support shortens audits and increases lender confidence.
Treating rework as invisible. It’s variable cost. Track and attack it.
Letting standards get stale. Update standards when processes change.
Capitalizing the wrong costs. Follow GAAP fundamentals; be consistent.
Confusing overhead drivers. Pick drivers that reflect real resource use.
Running for volume over mix. Fill the plant with profitable hours, not just hours.
Material: renegotiate terms, dual-source risk items, reduce scrap via SPC.
Labor: cross-train to cut overtime; use standard work to stabilize takt.
Overhead: deploy preventive maintenance to lift uptime; pursue low-capex automation where cycle time is unstable.
Tie each tactic to a KPI from your financial KPI set and review weekly at the line level.
A fabricator sees gross margin drop from 28% to 23% in two months. Price is stable. Mix is unchanged. Variance review shows:
Material usage variance +2.2% (scrap up)
Labor efficiency variance –1.8% (overtime up)
Overhead volume variance –1.5% (downtime)
Root causes: a new alloy with tighter tolerance, a critical press with rising unplanned downtime, and a learning-curve gap for a new shift.
Actions:
Qualify a second supplier and tighten nesting to cut scrap, applying practices from improve inventory efficiency through cost optimization.
Advance the press overhaul; justify with equipment upgrade planning.
Launch standard work + training; rebalance shifts.
In 60 days, COGM per standard hour falls 6.4%, contribution improves, and cash tied in WIP drops by two days.
Three habits keep COGM honest:
One source of truth: integrate time, materials, and routing data with your GL via an ERP built for manufacturing.
Automated posting: reduce manual error with accounting automation.
Close discipline: reconcile WIP and variances monthly per your financial management control process.
COGM is not a report. It is a control system. When you calculate it correctly, review it relentlessly, and connect it to scheduling, purchasing, labor, and maintenance, it becomes your most reliable early-warning signal for margin risk and your cleanest lever for profit improvement. Tie it to contribution margin, forecast it forward, and hold the line on standards. The math will reward you.
Want tighter control over COGM, margins, and cash conversion?
Contact Accounovation to implement manufacturing-grade cost systems that turn factory data into profit clarity.