Manufacturing Income Statement: COGS and COGM Calculation
Manufacturing Income Statement Complexity
The Income Statement for a manufacturing company is the most complex of all business types because it must accurately track and allocate the costs of converting raw materials into finished goods.
The core complexity lies in the calculation of the Cost of Goods Sold (COGS), which requires the use of several schedules to move costs through three different inventory accounts: Raw Materials, Work-in-Process (WIP), and Finished Goods.
Key Distinguishing Feature: COGS Calculation
The primary difference between a manufacturing income statement and that of a service or merchandising company is the multi-step calculation of COGS. In a manufacturing context, COGS is calculated using the Cost of Goods Manufactured (COGM), which summarizes all costs incurred in the factory during the period.
1. Cost of Goods Manufactured (COGM)
This schedule calculates the total cost of products that were completed during the period and transferred out of Work-in-Process (WIP) inventory into Finished Goods inventory.
The Total Manufacturing Costs are the sum of the three primary product cost components:
| Component | Description |
|---|---|
| Direct Materials | Cost of raw materials that become an integral part of the finished product and can be traced to it. (e.g., steel for a car). |
| Direct Labor | Wages paid to employees who physically convert the raw materials into finished goods. (e.g., assembly line worker wages). |
| Manufacturing Overhead (MOH) | All other indirect manufacturing costs (e.g., factory utilities, depreciation on production equipment, indirect labor, factory manager salaries). |
2. Cost of Goods Sold (COGS)
Once COGM is determined, it is used to calculate the COGS—the cost assigned to the goods that were sold to customers during the period.
Manufacturing Company Income Statement Structure
The multi-step income statement for a manufacturing company segregates operating activities from non-operating activities to provide detailed profitability insights. The structure is typically divided into three main sections:
I. Gross Profit Section
This section determines the profitability of the company’s core function: manufacturing and selling its products.
| Particulars | Amount ($) |
|---|---|
| Sales Revenue | XXX |
| Less: Sales Returns and Allowances | (X) |
| Net Sales | A |
| Less: Cost of Goods Sold (COGS) | (B) |
| Gross Profit (A – B) | XXX |
II. Operating Activities Section
This section deducts all non-manufacturing costs (known as period costs) from the Gross Profit to arrive at the Operating Income.
| Particulars | Amount ($) |
|---|---|
| Gross Profit | XXX |
| Less: Operating Expenses (SG&A) | |
| Selling Expenses (e.g., Sales staff salaries, advertising, sales commissions, warehouse rent, delivery costs) | (XX) |
| Administrative Expenses (e.g., Executive salaries, office rent, accounting fees, general office supplies) | (XX) |
| Total Operating Expenses | (XXX) |
| Operating Income (EBIT) | XXX |
Operating Income (EBIT), or Earnings Before Interest and Taxes, reflects the profitability of the company’s core business operations before considering financing and taxes.
III. Non-Operating Activities Section
This section includes revenues and expenses not directly related to the company’s main line of business (manufacturing).
| Particulars | Amount ($) |
|---|---|
| Operating Income (EBIT) | XXX |
| Add: Non-Operating Income (e.g., Interest Revenue, Gain on Sale of Assets) | XX |
| Less: Non-Operating Expenses (e.g., Interest Expense, Loss on Sale of Assets) | (X) |
| Income Before Taxes (EBT) | XXX |
| Less: Income Tax Expense | (XX) |
| Net Income | XXX |
Net Income is the final measure of the company’s overall financial performance for the period.