Cost of goods sold is the direct cost of producing a good, which includes the cost of the materials and labor used to create the good. COGS directly impacts a company’s profits as COGS cogs acronym is subtracted from revenue. If a company can reduce its COGS through better deals with suppliers or through more efficiency in the production process, it can be more profitable.
What is COGS in retail?
COGS or cost of goods sold refers to any cost that goes directly into products sold by a manufacturer or retailer. “COGS are typically those expenses that are directly attributable to the acquisition of inventory and bringing it to the location of sale.
Weekly inventory allows visibility into trends and reduces fluctuations in costs. Purchasing programs can provide insight into products that are similar to the ones that you are using that are lower cost and provide the restaurant with rebates. Lastly, costing out your menu allows you the ability to determine menu items with high elasticity to make educated decisions around menu pricing. While bulk purchases can provide discounts for the restaurant, they should only be done on items that have high-velocity sales within the restaurant. Purchasing in bulk on items that are not used within the period can increase counting errors, decrease item quality, lead to potential theft, and result in waste of product.
What’s included in the cost of goods sold?
Some companies that sell a mix of products and services prefer a broader term, cost of revenue, of which COGS is one component. In accounting, COGS is a standard item in the expense section of a company’s profit and loss statement (P&L). Costs can only be expensed and shown in the P&L after the goods have been sold and their revenues reported in the P&L. The cost of creating goods or services that are not sold should not be included. Cost of goods sold is the total of the costs directly attributable to producing things that can be sold. COGS includes direct costs, such as material and labor, but does not include indirect costs, such as sales, marketing or distribution.
This is critical when setting customer pricing to ensure an adequate profit margin. Determine the cost of purchases of raw materials that were made during the period, taking into account freight in, trade and cash discounts. COGS includes all direct costs needed to produce a product for sale. Lower COGS means higher profitability, and that you’ll likely pay more taxes.
Using cost of goods sold to improve profitability
“Operating expenses” is a catchall term that can be thought of as the opposite of COGS. It deals with the costs of running a business, but not necessarily the costs of producing a product. Operating expenses include selling, general and administrative (SG&A) expenses such as insurance, legal and accounting fees, travel, taxes and office supplies. Excluded from operating expenses are COGS items as well as nonoperating expenses, such as interest and currency exchange costs.
What is COGS also known as?
Cost of goods sold (COGS) is the carrying value of goods sold during a particular period. Costs are associated with particular goods using one of the several formulas, including specific identification, first-in first-out (FIFO), or average cost.