Cost of Goods Sold — Manufactured Product
Recording the cost of drugs manufactured in-house and transferred to finished goods inventory, then expensed on sale.
| Account Name | Type | Debit ($) | Credit ($) |
|---|---|---|---|
| Cost of Goods Sold | Expense (+) | 320,000.00 | - |
| Finished Goods Inventory | Asset (-) | - | 320,000.00 |
💡 Accountant's Note
Pharmaceutical COGS includes raw material (API — Active Pharmaceutical Ingredient), excipients, packaging, manufacturing labour, and overhead. Yield losses, rework costs, and batch failures are included in manufacturing cost. For biologics, the manufacturing cost per unit is significantly higher due to the complexity of the process.
Practitioner & Systems Framework
💻 ERP Architecture
Pharmaceutical manufacturing costs are tracked through the production module (SAP PP or Oracle Manufacturing). Each batch is given a production order that captures the actual material consumption, labour hours, and overhead absorption. The standard cost system sets a cost per unit for each product and values finished goods at standard cost. Variances between standard and actual manufacturing costs are posted to variance accounts and investigated. COGS is posted at the time of sale (delivery to the wholesaler) at the standard cost. Period-end standard cost updates reflect changes in API prices, manufacturing yields, or overhead rates.
⚠️ Audit Flags
Auditors test the standard cost assumptions underlying COGS — particularly API costs (which can be volatile), batch yields, and overhead absorption rates. For biologics, batch failure rates have a significant impact on effective COGS per saleable unit — test that failed batches are expensed immediately and not carried in inventory. Confirm that pre-launch inventory (manufactured before regulatory approval) has been properly assessed — inventory produced before approval is typically expensed as R&D (not capitalised) under US GAAP / IFRS. Test inventory valuation at the lower of cost and NRV.
📄 Required Documentation
Production batch records (batch number, yield, raw material consumption), standard cost card per product (API cost, excipient, labour, overhead), variance analysis report, failed batch disposition records, pre-launch inventory accounting policy, COGS-to-sales reconciliation, and inventory valuation (lower of cost/NRV) assessment.
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