Cost of goods sold budget

Components of the cost of goods sold (COGS) budget

The COGS budget includes three primary sections:

1. Budgeted cost of goods manufactured (COGM): This encompasses all direct and indirect costs required to produce finished goods, including direct materials, direct labor, and overhead costs (both fixed and variable).
2. Costing of finished goods inventory: This calculates the values of beginning inventory and ending inventory for finished goods. For inventory valuation, we apply the FIFO method for uniformity in the examples discussed in this section.
3. Budgeted COGS schedule: The final schedule combines all these components, arriving at the total COGS for the period, feeding directly into the income statement.

1. Cost of goods manufactured (COGM)

The cost of goods manufactured (COGM) is a financial metric representing the total manufacturing costs incurred to produce goods that have been completed within a specific period. It includes the following:

• Direct materials
• Direct labor
• Variable overhead; and
• Fixed overhead
• Changes in work-in-process inventory (WIP) during the period

COGM is a key component in calculating the cost of goods sold (COGS), as it identifies the costs involved in producing finished goods available for sale. The COGM total flows into the COGS schedule, which ultimately feeds into the income statement, impacting gross profit and overall profitability.

Below are proforma examples in table format for each type of company to illustrate the differences:

Manufacturing company (COGM calculation)

For manufacturing companies, COGM includes all production-related costs, specifically direct costs (like raw materials and labor) and indirect costs (like factory overhead).

The WIP inventory represents partially completed goods still in the production phase, including costs for materials, labor, and overhead incurred up to a certain point in the manufacturing process. Unlike finished goods, WIP inventory has not yet been fully converted into saleable items, reflecting an investment in resources that will contribute to future periods’ cost of goods manufactured. WIP and its detailed cost accounting are explored further in Section C of CMA Part 1.

Retail company (COGP calculation)

Retail companies don’t manufacture products but rather purchase goods for resale, meaning they don’t incur production-related costs like direct labor or factory overhead. The equivalent of COGM for retailers is the cost of goods purchased (COGP), focusing only on costs related to purchasing and transporting inventory for resale.

The GreenLine Furniture COGM

From GreenLine Furniture’s example:

From GreenLine Furniture’s example:

From GreenLine Furniture’s example:

Combining all the manufacturing cost budgets above, we get the following:

In this example we are assuming an even WIP at the end of each period amounting to $1,000. We have simplified the costing for the WIP because this is covered by another section. This example simply means that GreenLine finishes each period with the same levels of unfinished products.

This completed COGM reflects all GreenLine’s production costs, which are now ready to flow into the cost of goods sold schedule as part of the larger budgeting process. This total captures the value of goods completed at the period.

2. Costing of finished goods inventory

In order to compute the COGS, we need the changes in finished goods inventory, which means that we need the costs of the beginning inventory and ending inventory.

For this example, we will use FIFO to ensure consistent valuation.

To determine the cost of the beginning inventory, the best option would be to pick-up the cost of ending inventory of the previous period and use it as the beginning inventory cost of the next period. For simplicity, we assume that the costs per unit remain the same as in the previous period. However, in practical scenarios, costs can vary due to production level changes, which would impact per-unit costs that are used to allocate to the ending inventories.

Please check the COGM section on how the cost per unit of $47.59 was computed. These computed costs will feed into the final COGS budget in the next section.

3. Cost of goods sold schedule

The relevant formula for the COGS schedule are as follows:

$$\begin{array}{rl}\text{Cost of goods sold}& =(\text{Beginning inventory}+\text{Cost of goods manufactured})-\text{Ending inventory}\\ & =\text{Cost of goods available for sale}-\text{Ending inventory}\end{array}$$

Here’s the final schedule for GreenLine Furniture’s COGS:

This COGS budget for GreenLine Furniture provides the total COGS as $237,955, which will flow into the income statement as the cost offsetting sales revenue for Q4 to determine the gross profit. This calculation offers a clear view of production and inventory costs, supporting GreenLine’s assessment of profitability and efficiency.