Machine shop COGS has three components: direct materials, direct labor, and manufacturing overhead. You need to track all three by job, then add up the total costs of jobs completed and shipped during the period.

Direct materials include the raw stock you cut into. Bar stock, plate, sheet metal, castings, forgings. Whatever you’re machining started as something you purchased. Track the actual material cost for each job, not an estimate. If you cut a part from a 12-foot bar and only use 4 feet, allocate one-third of that bar’s cost to the job. Include any outside processing like heat treating or plating that becomes part of the finished piece.

Direct labor is machinist time spent working on jobs. This means setup time, run time, and inspection. Track hours by job and multiply by the labor rate including wages and payroll taxes. Some shops track machine time separately from labor time since one operator might run multiple machines. Either way, the labor that goes directly into producing parts belongs in COGS.

Manufacturing overhead is everything else that keeps the shop running but can’t be tied to a single job. Machine depreciation, tooling, coolant, shop supplies, utilities, maintenance, facility costs. You allocate overhead to jobs using a rate based on machine hours, labor hours, or labor dollars. Most machine shops use machine hours since that reflects actual production capacity consumed.

The formula comes together like this: for each completed job, add direct materials plus direct labor plus allocated overhead. Then sum up all completed jobs for the month. That total is your COGS for the period.

Job costing makes this work. Without tracking costs by job, you’re guessing at COGS and you have no idea which jobs made money. A job that looks profitable at quote might lose money once you account for actual material usage, extra setup time, and machine hours consumed.

Set up your accounting software to capture costs at the job level. When you buy material, code it to the job. When machinists log time, assign it to jobs. Calculate your overhead rate annually and apply it consistently. Your small business bookkeeping services provider can help configure this if you’re not sure how to structure it.

For shops doing repeat work, you can use standard costs based on historical averages and adjust for variances. For custom one-off jobs, actual costing is more accurate even though it requires more tracking discipline.

Getting COGS right matters beyond taxes. It tells you your true gross margin, which jobs are profitable, and whether your pricing covers actual production costs. Manufacturing businesses that track COGS properly can bid work confidently instead of hoping margins work out.