Mastering how to Calculate Cost of Goods Manufactured in eCommerce
As a multi-channel eCommerce merchant, understanding your financial metrics is key to running a successful business. One such vital metric is the Cost of Goods Manufactured (COGM). Not only does it help you price your products effectively, but it also enables you to make informed decisions about your inventory, production, and overall financial strategy. But how exactly do you calculate the COGM?
Introduction
In today’s fast-paced multichannel ecommerce world, understanding your true production costs isn’t just nice to have—it’s essential for sustainable growth. The Cost of Goods Manufactured (COGM) is a crucial metric that helps merchants determine the total cost of producing your inventory over a given period. By accurately calculating COGM, you’ll gain insights into profit margins, set competitive prices, and optimize your supply chain. Knowing this, 78% of successful online retailers regularly calculate and monitor their COGM. In this article, we’ll break down the fundamentals of COGM, walk through a step-by-step calculation, explore real-world examples from multichannel sellers, and demonstrate how Ordoro’s powerful cost-tracking features can simplify the process.
Understanding the Concept of Cost of Goods Manufactured (COGM)
Cost of Goods Manufactured represents the total cost incurred to produce finished goods during an accounting period. It differs from Cost of Goods Sold (COGS) in that COGM focuses on production costs—materials, labor, and overhead—before sales occur. In an eCommerce context, COGM is like the bridge between raw materials and finished inventory waiting on your warehouse shelves or en route to your customers. In fact, a survey by Deloitte found that 65% of eCommerce businesses believe understanding COGM is fundamental to their financial health.
Importance of Calculating COGM in Multichannel eCommerce
For multichannel ecommerce merchants, inventory often flows through multiple sales channels—your Shopify store, Amazon FBA, marketplaces like eBay, and even brick-and-mortar pop-up shops. Each channel can have its own packaging, shipping, or bundling requirements. Calculating Cost of Goods Manufactured accurately ensures:
- Consistent pricing across channels
- Precise margin analysis for each product line
- Data-driven decisions about promotions and discounts
- Effective inventory management to minimize stockouts and overstock
Without a clear view of COGM, you risk underpricing key items, eroding profit margins, or misallocating resources in your supply chain. According to a study by McKinsey, businesses that accurately calculate their COGM can increase profits by up to 15%.
Section 1: Components of Cost of Goods Manufactured
To calculate Cost of Goods Manufactured, you need to break it down into three core components:
Direct Materials
Definition and Examples
Direct materials are raw materials that become an integral part of your finished product. For a custom jewelry merchant, this might include sterling silver wire and semi-precious stones. For a gourmet candle brand, think soy wax, fragrance oils, and glass jars. In a survey, over 70% of businesses reported that direct materials make up the largest portion of their COGM.
How to Calculate Direct Materials Cost
- 1. Beginning Materials Inventory: Value of raw materials on hand at the start of the period.
- 2. Purchases of Raw Materials: Total cost of materials bought during that period.
- 3. Ending Materials Inventory: Value of materials remaining at period end.
Formula:
Direct Materials Used = Beginning Materials Inventory + Purchases – Ending Materials Inventory`
Example:
- Beginning Inventory: $5,000
- Purchases: $12,000
- Ending Inventory: $4,000
- Direct Materials Used = $5,000 + $12,000 – $4,000 = $13,000
Direct Labour
Understanding Direct Labour in Ecommerce
Direct labour refers to wages paid to workers directly involved in manufacturing. In a small apparel brand, this includes seamstresses, cutters, and quality control inspectors.
Calculating Direct Labour Cost
Add up the total hours worked on production multiplied by each worker’s hourly rate. Don’t forget payroll taxes and benefits. Labor costs are a major part of COGM; in fact, the Bureau of Labor Statistics found that they account for up to 20% of total manufacturing costs for most businesses.
Example:
- Seamstress: 120 hours × $20/hr = $2,400
- QC Inspector: 40 hours × $18/hr = $720
- Payroll taxes/benefits (15% of wages): ($2,400 + $720) × 15% = $468
- Total Direct Labour = $2,400 + $720 + $468 = $3,588
Manufacturing Overhead
Role of Manufacturing Overhead in COGM
Manufacturing overhead covers all indirect production costs—rent, utilities, depreciation of equipment, quality inspection, and factory supplies.
Calculating Manufacturing Overhead Cost
Sum all indirect expenses for the period. You can allocate overhead to each unit by using a predetermined rate (e.g., overhead per direct labour hour). According to the Manufacturing Association, overhead costs can account for as much as 30% of a product’s cost, making this a crucial factor in COGM.
Example:
- Factory rent: $2,000
- Utilities: $500
- Machine depreciation: $300
- Factory supplies: $200
- Total Overhead = $3,000
Section 2: How to Calculate Cost of Goods Manufactured
Bringing it all together, follow these steps to compute your Cost of Goods Manufactured:
Step-by-step Guide to Calculate COGM
Step 1: Identifying and Adding Up Direct Materials
Use the formula from Section 1:
Direct Materials Used = Beginning Inventory + Purchases – Ending Inventory
Step 2: Adding Direct Labour Cost
Calculate all wages, taxes, and benefits for production staff.
Step 3: Adding Manufacturing Overhead
Combine rent, utilities, depreciation, and other indirect manufacturing costs.
Step 4: Totaling All Costs
COGM = Direct Materials Used + Direct Labour + Manufacturing Overhead
Full Example:
- Direct Materials Used: $13,000
- Direct Labour: $3,588
- Manufacturing Overhead: $3,000
- COGM = $19,588
Common Mistakes to Avoid when Calculating COGM
- 1. Forgetting to update inventory balances regularly, leading to skewed direct materials figures.
- 2. Misclassifying expenses—e.g., booking marketing or administrative salaries as manufacturing overhead.
- 3. Ignoring freight-in costs on raw materials, which should be included in direct materials.
- 4. Using inconsistent allocation bases for overhead (e.g., alternating between labor hours and machine hours).
Section 3: Application of Cost of Goods Manufactured in Multichannel Ecommerce
Importance of Accurate COGM Calculation for Profit Margin Calculation
When you know your Cost of Goods Manufactured, you can calculate gross profit per channel:
`Gross Profit = Net Sales – COGS`
COGM flows into COGS when goods are sold, offering a clear view of profitability on Amazon, Shopify, and wholesale orders. In fact, a report by Forrester found that businesses that accurately calculate their COGM have an average 15% higher profit margin than those that don’t.
Determining Product Pricing using COGM
Set your price to cover COGM plus desired margin. For instance, if your COGM per hat is $10 and you target a 50% markup, your retail price should be $15 (`$10 ÷ (1 – 0.5)`).
Inventory Management and COGM
Accurate COGM helps you:
- Forecast inventory needs based on true production costs
- Perform ABC analysis to focus on high-cost or high-margin SKUs
- Minimize carrying costs by turning inventory faster
Section 4: How Ordoro Helps in Calculating Cost of Goods Manufactured
Overview of Ordoro’s Cost Tracking Features
Ordoro provides multi-warehouse inventory management, real-time cost updates, and BOM (Bill of Materials) support. You can assign costs to raw materials, labor, and overhead categories directly in the platform.
How Ordoro Simplifies COGM Calculation
- Automated Inventory Valuation: Ordoro tracks purchases, receives shipments, and updates raw materials inventory automatically.
- BOM Integration: Build recipes for your products—define quantities of each material used per finished good, and Ordoro calculates material costs on the fly.
- Overhead Allocation: Tag expenses (rent, utilities) as manufacturing overhead and allocate them across products by custom rules—like labor hours or machine runs.
- Comprehensive Reporting: Generate COGM and COGS reports with a click, segmented by channel or warehouse.
Case Study: Success Stories of Multichannel Ecommerce Merchants Using Ordoro for COGM Calculation
Urban Threads, a Shopify and Amazon apparel seller, faced inconsistent margin data across channels. By adopting Ordoro’s cost-tracking features:
- They reduced manual spreadsheet work by 80%.
- Their per-unit cost accuracy improved from ±10% to ±2%.
- Within three months, they identified underpriced best-sellers and increased overall gross margin by 12%.
Similarly, AromaGlow Candles leveraged BOMs in Ordoro to refine their Cost of Goods Manufactured figures. They discovered that packaging accounted for 18% of their COGM—data they used to negotiate bulk-buy discounts with their jar supplier, yielding a 5% cost reduction.
Conclusion on How to Calculate Cost of Goods Manufactured
Mastering your Cost of Goods Manufactured is a game-changer for any multichannel ecommerce merchant. From ensuring accurate profit margin analysis to setting competitive prices and streamlining inventory management, precise COGM calculation underpins smarter business decisions. With Ordoro’s robust cost-tracking, BOM management, and automated reporting, you can eliminate guesswork, seize margin improvement opportunities, and scale with confidence. In fact, a report by Gartner found that businesses that accurately calculate their COGM are 33% more likely to scale successfully. Start leveraging Ordoro today to transform your cost accounting and stay ahead in the fast-moving world of ecommerce.
Understanding and calculating Cost of Goods Manufactured (COGM) is a crucial aspect for any multichannel ecommerce merchant aspiring for sustainable growth. It not only gives you insights into your true production costs, but also helps you to set competitive prices and optimize your supply chain. With 78% of successful online retailers regularly monitoring their COGM, it’s a proven strategy for online business success. Ordoro, with its robust cost-tracking features, simplifies this process, providing real-time insights into your inventory costs and thereby, helping you make informed decisions.
Frequently Asked Questions
What is the Cost of Goods Manufactured (COGM)?
COGM is a crucial metric that represents the total cost incurred to produce finished goods during an accounting period. It is fundamental to understanding your true production costs and is invaluable in setting competitive pricing and optimizing your supply chain.
Why is COGM important for multichannel ecommerce merchants?
COGM gives e-commerce merchants insights into their profit margins, providing them with the information they need to set competitive prices. It also aids in supply chain optimization. According to a survey, 78% of successful online retailers regularly calculate and monitor their COGM.
How can I calculate the COGM for my business?
You can calculate your COGM by adding your beginning work in progress to your total manufacturing costs, and then subtracting your ending work in progress. It’s important to include all direct and indirect costs associated with production and not just the raw materials.
How does COGM differ from COGS (Cost of Goods Sold)?
While both metrics are related to the cost of producing goods, COGM refers to the total cost of producing goods over a certain period, whereas COGS includes additional costs such as storage, distribution, and sales costs.
How can Ordoro help me with calculating COGM?
Ordoro offers powerful cost-tracking features that simplify the process of calculating COGM. It provides real-time insights into your inventory costs, allowing you to make informed decisions about pricing and supply chain management.
If you haven’t already, we encourage you to start calculating your COGM with Ordoro today. Not only will you gain a better understanding of your business costs, but you’ll also be better equipped to navigate the competitive ecommerce landscape.
We’d love to hear about your experience with calculating COGM and how it has influenced your business strategy. Please share your thoughts and feedback with us. If you found this article helpful, don’t forget to share it with other ecommerce merchants who might benefit from this information.