Optimizing the Cost Of Goods (COGS) sold is one of the best ways to determine the total cost of your production that will be useful in calculating your gross profit. By definition, the Cost of Goods Sold is the direct cost of producing the goods sold by a company (thanks, Investopedia!). While the metric seems simple on the surface, it gives valuable insights into areas of future growth and improvement. We'll take you through how to calculate this metric, how to understand it in the context of your industry, and how to apply it to the platforms you're using now.
You can calculate COGS by adding the beginning inventory and purchases made during the period, then subtracting the ending inventory from it. COGS can be assessed for various time-periods (i.e. day, week, month, year) and, if your purchases, beginning inventory, and ending inventory are tied to certain products or campaigns, you can assign a specific COGS for each.
If you’re confused about how to define the beginning inventory, purchases, and ending inventory, we’ve included some nifty definitions and examples below:
You may be wondering, how do I know which value to attribute to each unit of inventory if I bought materials at different prices? There are three methods to answer this question: Weighted Average Cost (WAC); First in, First out (FIFO); and Last in, First out (LIFO). Each presents a general rule to make calculating COGS consistent over time and across businesses. We recommend reading about each method’s pros and cons and deciding which works best for your business.
When choosing how to calculate COGS, remember: consistency is key! That means, if you decide to use LIFO for the month, you should do that for the next month’s COGS as well. Having consistent metrics will allow you to better identify the causes of good or bad performance.
Again, as you begin (consistently) monitoring COGS, you’ll be able to find insights specific to your strategy. Of course, it’s also important to understand your COGS in relation to your broader industry. To help you know what to expect, we’ve included a list of average Gross Profit Margins (aka the leftover income when you subtracted the COGS from your total income):
While the Cost of Goods Sold is easy to calculate, it’s important to keep in mind that COGS is one of many valuable metrics to track your performance. If you don’t want to spend hours at the end of the month juggling numbers from your spreadsheet, consider trying Lido. Lido can help you build a dashboard to monitor your data and give a look into how your key metrics (such as COGS) change over time.
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