Computing Cost of Goods Manufactured

Accurately computing cost of goods manufactured is imperative to the success of your business. Under-pricing products will result in loss of potential profits. Over-pricing products will send your customers scurrying over to your competition. Ultimately, either of these errors could cause your business to fail. Computing cost of goods manufactured is an ongoing task reflected in your monthly financial statements and subject to the scrutiny of others, including auditors.

Things You'll Need

• Direct labor cost
• Processing times
• Material costs
• Bill of Materials (BOM)
• Overhead allocation rates
• Spreadsheet software

Instructions

1. Input current cost of materials into the BOM of each product. Vendor cost can vary from month to month, therefore, actual material cost may need to be updated each month. Setting up a spreadsheet for each product manufactured can make monthly cost updating a quick process. From the BOM, list the part numbers, names, suppliers, and cost in separate columns. New costs input into the spreadsheet each month are added automatically by formulas. This can make updating material cost an efficient process.

2. Check with manufacturing areas for assembly times, stamping times, molding times, shot times for the month, and calculate the average time for each process. These process times can vary because of parts outages, machine breakdowns, labor issues and order quantities. For estimating new products, develop standard times from your averages gathered over several months.

3. Multiply the average time for each process by the allocation rate for the process. This gives you the direct processing cost of the product. Again, if you are using a spreadsheet and have formulas entered, the new costs are calculated automatically.

4. Add the total updated material costs together with the direct processing cost for each of the goods manufactured. If you are using spreadsheet software, this final calculation will happen automatically as you enter new data.

5. Multiply the total updated cost of each product by the quantity of that product that was produced for the month. If you have more than one product being manufactured, repeat this process for each product. Add the totals together for the total cost of all goods manufactured.

Tips & Warnings

• Develop standard cost rates to use for cost projections from the averages of actual costs.

• Always double check formulas, calculations, and compare them to industry averages whenever possible.