Finance fundamentals
Manufacturing COGS Formula
Manufacturing COGS is a two-step calculation. Step 1 — find Cost of Goods Manufactured: COGM = Direct Materials Used + Direct Labor + Manufacturing Overhead + Beginning WIP − Ending WIP. Step 2 — convert COGM to COGS: COGS = Beginning Finished Goods + COGM − Ending Finished Goods.
A retailer buys a finished product and resells it — one inventory account, one subtraction. A manufacturer converts raw materials into a product through three inventory stages, which is why the formula needs an extra step. For the single-step retail version, see our general COGS guide.
The three components of COGM
Direct Materials Used
Beginning Raw Materials + Purchases − Ending Raw Materials
The raw materials actually consumed in production this period — not just what you bought. Materials still sitting in the warehouse haven't been used yet.
Direct Labor
Wages of production employees
Pay for workers physically building the product: assembly line staff, machine operators, floor supervisors. Sales and admin salaries are excluded.
Manufacturing Overhead
Factory rent + utilities + equipment depreciation + indirect labor
Every production cost that isn't direct materials or direct labor. Office rent and sales expenses are never included here.
Worked example: a full COGM-to-COGS schedule
A small furniture manufacturer closes out the quarter with these numbers:
| Line item | Amount |
|---|---|
| Beginning raw materials | $20,000 |
| + Raw material purchases | $60,000 |
| − Ending raw materials | $15,000 |
| = Direct materials used | $65,000 |
| + Direct labor | $40,000 |
| + Manufacturing overhead | $25,000 |
| = Total manufacturing cost | $130,000 |
| + Beginning WIP | $10,000 |
| − Ending WIP | $12,000 |
| = COGM (Cost of Goods Manufactured) | $128,000 |
| + Beginning finished goods | $18,000 |
| − Ending finished goods | $22,000 |
| = COGS | $124,000 |
Notice the two adjustments that make manufacturing different from retail: WIP inventory (product started but not finished) sits between materials/labor/overhead and COGM, and finished goods inventory sits between COGM and COGS. The factory produced $128,000 of finished goods this quarter, but because finished goods inventory grew by $4,000, only $124,000 worth actually sold.
Three mistakes that break the manufacturing COGS formula
Overhead includes non-production costs
Office rent, sales commissions, and administrative salaries are period expenses, not manufacturing overhead. Mixing them in overstates COGS and understates operating expenses — it distorts gross margin.
WIP change gets skipped
Skipping the WIP adjustment treats every dollar spent on materials, labor, and overhead as if it finished production this period. Any product still on the factory floor at period end needs to be backed out.
Purchases used instead of materials used
Raw material purchases and raw materials used are not the same number. If you bought more than you consumed, using the purchase figure inflates COGS and understates raw materials inventory on the balance sheet.
Frequently asked questions
What is the COGS formula for a manufacturing company?+
Manufacturing COGS takes two steps instead of one. First calculate Cost of Goods Manufactured (COGM): direct materials used + direct labor + manufacturing overhead, adjusted for the change in work-in-process (WIP) inventory. Then calculate COGS: beginning finished goods inventory + COGM − ending finished goods inventory. Retail businesses skip the first step entirely because they buy finished products rather than building them.
What is the difference between COGM and COGS?+
COGM is the total cost of everything the factory finished producing this period — it becomes an input, not the final answer. COGS is the cost of what actually sold this period. The two differ by the change in finished goods inventory: if you manufactured more than you sold, COGM is higher than COGS and the difference sits in inventory; if you sold from existing stock, COGS can exceed COGM for the period.
Is direct labor included in manufacturing COGS?+
Yes — direct labor is one of the three core components of COGM, alongside direct materials and manufacturing overhead. This means wages for employees physically involved in production: assembly line workers, machine operators, production supervisors on the floor. Salaries for sales staff, accounting, and executive management are period expenses, not COGS, regardless of how the business is organized.
What is included in manufacturing overhead?+
Manufacturing overhead is every production cost that isn't direct materials or direct labor: factory rent and utilities, depreciation on production equipment, indirect labor (maintenance staff, quality inspectors), factory supplies, and equipment repairs. It does not include office rent, sales commissions, marketing, or administrative salaries — those are operating expenses reported separately on the income statement.
How is manufacturing COGS different from retail COGS?+
Retail COGS is a single-step calculation: beginning inventory + purchases − ending inventory, because a retailer buys finished goods and resells them unchanged. Manufacturing COGS requires two steps and three inventory accounts (raw materials, WIP, and finished goods) because the business is converting materials and labor into a new product. See our general COGS guide for the retail version of the formula.
Related tools and guides
The single-step retail and ecommerce version of the formula.
COGS is the denominator behind DIO and DPO in the cash cycle.
See how fast raw materials and finished goods actually move.
Calculate gross margin once you have your COGS figure.
See how COGS flows into gross margin and then net margin.
Use your manufacturing cost structure to find your break-even unit volume.