I remember standing in the back corner of a 40,000-square-foot assembly facility in mid-January last year, staring at a literal wall of half-finished electronics. We’d just survived a staggering 5.3x return spike during the BFCM rush, and our floor space was physically running out. My CFO was breathing down my neck because our "inventory" value on the balance sheet looked healthy, but our actual cash flow was a disaster. We had plenty of raw materials and thousands of units in "purgatory," but we couldn't accurately say what our finished inventory was worth. It’s a moment every operator dreads, but it’s the inevitable result of having a disconnected view of your production math. If you aren't obsessing over your manufacturing economics, you aren't running a brand; you’re just managing a very expensive, very crowded storage unit until the wheels fall off.
The Foundation of Factory Math: What is COGM?
If you’re a founder moving from dropshipping to in-house assembly, or an ops lead taking over a growing DTC brand, you’ve likely realized that "inventory" is a slippery concept. You might know what you paid for a pallet of parts, but do you know what it actually cost to turn those parts into a sellable product? This is why knowing how to calculate cost of goods manufactured is the most critical skill for any physical product brand.
COGM represents the total value of all products that were moved from the "Work-in-Process" (WIP) phase to the "Finished Goods" phase during a specific period. It is the bridge between your factory floor and your income statement. Unlike the manufacturing cogs formula, which only tells you the cost of items that have sold, the cost of goods manufactured formula tells you the value of what you actually produced.
Here’s where ops breaks: many brands treat their manufacturing costs as a "black box" until the end of the year. (I’ve spent far too many nights staring at a spreadsheet, realizing our hero SKU was actually costing us 20% more to build than we projected because we weren't tracking indirect labor). If you don’t have a real-time schedule of cost of goods manufactured, you’re just guessing at your margins.
The Three Pillars: Total Manufacturing Cost Formula
Before you can solve the final equation, you have to gather your three primary inputs. This is often referred to as the total manufacturing cost formula. Without these three buckets, you can't even begin to understand how to find cost of goods manufactured.
1. Direct Materials Used
This isn't just the raw materials sitting in the warehouse; it’s the value of the materials that actually moved onto the production line. To find this, you take your beginning raw materials inventory, add your purchases for the month, and subtract your ending raw materials.
2. Direct Labor
This includes the wages, benefits, and payroll taxes of the people who physically touch the product. If they are on the assembly line, their cost is direct. If they are the warehouse manager supervising ten different lines, their cost belongs in the next bucket.
3. Manufacturing Overhead
This is the silent killer of DTC margins. It includes everything from factory rent and utilities to depreciation on your CNC machines and the salaries of quality control teams. I recall an honest failure case with a skincare brand that forgot to include the cost of electricity and specialized water filtration in their how to calculate the cost of goods manufacturedlogic. They were under-costing their serum by $2.40 per bottle. Over 100,000 bottles, that's a quarter-million dollar hole in their profit.
Now the logistics math that matters: every second an item sits in an unfinished state, it is consuming overhead without generating value. (In my opinion, WIP is just another word for "stagnant cash").
The Calculation: How to Calculate Cost of Goods Manufactured Example
Let’s get into the weeds. To understand how to calculate the cost of goods manufactured, you need to look at the transition of inventory. We often see this presented in a formal schedule of cost of goods manufactured.
Here is a how to calculate cost of goods manufactured example for a boutique apparel brand:
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Beginning WIP Inventory: $50,000 (Items started last month but not finished)
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Direct Materials Used: $120,000
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Direct Labor: $80,000
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Manufacturing Overhead: $40,000
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Ending WIP Inventory: $30,000 (Items still on the line at month-end)
To find the COGM, we use the formula:
In this example:
This $260,000 represents the value of the "Finished Goods" that are now ready to be shipped. This is the number that feeds into your how to calculate cost of finished goods manufactured reports. But wait, there’s a catch. If your warehouse is a mess, your "Ending WIP" number is likely just a guess. (Honestly, I’m still uncertain why brands don't invest in better RFID tracking for WIP—it would solve 90% of these reporting headaches).
Where the System Fails: The Return Backlog Trap
Now the logistics math that matters: most operators learn how to calculate costs of goods manufactured for the forward journey, but they completely ignore the "Reverse Loop." When a product is returned, it creates a massive wrench in your manufacturing data.
During that 5.3x return spike, our partner brand had thousands of units returned. Some were "A-Stock," but others needed light refurbishing. Traditionally, if you want to know how to calculate cost of goods manufactured for refurbished items, you have to treat the refurbishing line as its own mini-factory.
I recall a failure case where a footwear brand was paying $27 in return processing for an item with a $19 resale value. They were sending everything back to their main warehouse in Ohio from all over the country. Their manufacturing cogs formula was being destroyed by the labor and freight costs of the returns. They were essentially "re-manufacturing" the product at a loss.
How Closo Solves Returns for Brands
This is where the traditional manufacturing conversation usually stops—at the warehouse door. But in 2026, the reverse loop is where the real margin is won or lost. How Closo solves returns is by turning that problem into a localized opportunity.
Instead of shipping every return back to a single mother-ship warehouse—which clogs your production floor and messes up your WIP counts—we route eligible returns locally.
We route eligible returns locally instead of sending everything back to the warehouse — cutting return cost from ~$35 to ~$5 and speeding refunds. By using localized return hubs, you keep the "returns clutter" out of your primary facility. This allows your production team to focus on making new products without tripping over boxes of returns.
Comparison: Centralized Warehouse vs. Localized Routing (Closo)
Predictive Intelligence: How Closo Predicts Demand with Google Trends & the AI
The biggest challenge in knowing how to calculate cost of goods manufactured is knowing how much to manufacture in the first place. If you over-produce, you have high storage costs. If you under-produce, you stock out.
How Closo predicts demand with Google Trends & the AI is by creating a feedback loop between the market and your inventory. Most supply chain management tools like ShipBob or NetSuite look at historical sales. But Closo’s AI analyzes real-time signals—like search interest and return patterns—to tell you where demand is actually surfacing.
If our AI knows that a specific sneaker style is trending in Los Angeles but being returned at a high rate in New York, we don't just tell you to manufacture more. We tell you to route those New York returns to a West Coast hub. This prevents you from over-inflating your COGM for new production when you already have perfect "A-Stock" units ready to be diverted. It’s about making your atoms work harder. For a deeper look at this, our brand hub offers blueprints on circular logistics.
Operators always ask me... "How do I handle 'Indirect' Materials?"
Common question I see: "Do I have to include the cost of glue, thread, or shipping tape in my cost of goods manufactured formula?" The answer is: Yes, but not as direct materials.
In a professional schedule of cost of goods manufactured, these are considered "Indirect Materials" and fall under Manufacturing Overhead. I recall an anecdote where a premium luggage brand was tracking every single screw as a direct material. Their warehouse team spent four hours a week just counting tiny parts. It was a waste of time. I’m of the opinion that if a part costs less than $0.05, you should just expense it to overhead and save the labor cost of tracking it.
Now the logistics math that matters: if you use high-end enterprise tools like Loop, Happy Returns, or Narvar, you can see the "Restock Rate" of your components. If you realize 10% of your product returns are due to a $0.10 zipper failing, your "Indirect Material" is actually causing a massive increase in your COGS.
The Refund Delay Impact: A Hidden Production Cost
When you are figuring out how to calculate cost of goods manufactured, you have to account for the "Asset Recovery" side. If a return sits on your dock for three weeks, it is "dead money."
I recall an honest failure case with an electronics brand in late 2024. They had a world-class assembly line, but their returns were a nightmare. Because they were centralized, it took 21 days for a returned item to be inspected and restocked. During those 21 days, their manufacturing cogs formula looked terrible because they were forced to manufacture new units to fill orders while the returned units sat in the dark.
By utilizing decentralized return hubs, you remove that "Inventory Purgatory." You get the items back onto the "digital shelf" in 48 hours. This allows you to lower your total production runs, which improves your cash-on-cash return. (Honestly, I’m still uncertain why brands are comfortable paying cross-country freight for items that could have stayed in the customer's home state).
Common question I see: "Is COGM the same as my unit cost?"
Here's something every ops leader asks. No, COGM is the total value for the period. To find your unit cost, you divide your COGM by the number of units completed.
But wait, there's a nuance. If you manufactured 10,000 units but 500 of them failed quality control and were scrapped, your COGM remains the same, but your unit cost for the sellable items goes up. This is why "Yield" is just as important as the formula for cost of goods manufactured. If you don't account for scrap, your margins are a fantasy.
Conclusion: Balancing the Art and the Atoms
Knowing how to calculate cost of goods manufactured is the difference between a brand that scales and a brand that collapses under its own weight. It requires a ruthless commitment to data—tracking every hour of labor and every scrap of material. But the formula is only as good as the physical flow it represents.
While the centralized warehouse model served us well for decades, the high cost of shipping and the complexity of modern returns have made it a bottleneck for growth in 2026. By combining the math of COGM with the agility of localized, AI-driven routing, you can stop "warehousing" your money and start "moving" it.
We route eligible returns locally instead of sending everything back to the warehouse — cutting return cost from ~$35 to ~$5 and speeding refunds. Would you like me to run an "Inventory Recovery Audit" on your last 90 days of production to see how much cash is currently trapped in your centralized return cycle?
FAQ
Operators always ask me: What is the most common mistake in a COGM calculation?
The most common mistake is failing to accurately value the Ending Work-in-Process (WIP). If you overestimate what is still on the line, you underestimate your COGM, making your finished goods look cheaper than they actually are.
Common question I see: How often should I run a Schedule of Cost of Goods Manufactured?
Monthly is the gold standard. Running it quarterly is too slow to catch production inefficiencies, and running it weekly is often too labor-intensive for the accounting team.
