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.
How to Calculate the Cost of Goods Sold
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:
- Beginning inventory is the leftover inventory from the last year or month that was not sold. This includes the products or merchandise that were not sold in the previous month or year.
- Purchase during the period is the additional purchases or productions that the manufacturers or company has made. This includes the raw materials and cost of labor for the additional products made.
- Ending inventory is the number of products that are not sold at the end of the month or year. This will be used as the beginning inventory for your next month/year’s COGS calculation.
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.
Connecting Cost of Goods Sold to Your Business
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):
- Agricultural Production Crops - 24.7%
- Agriculture Production Livestock and Animal Specialties - 34.5%
- Agricultural Services - 27.5%
- Forestry - 39.8%
- Fishing, hunting, and trapping - 15%
- Metal Mining - 33.7%
- Coal Mining - 23.3%
- Oil And Gas Extraction - 36.6%
- Building Construction General Contractors And Operative Builders - 22.4%
- Food And Kindred Products - 30.8%
- Tobacco Products - 43.2%
- Textile Mill Products - 21.4%
- Apparel And Other Finished Textile Products - 46.3%
- Lumber And Wood Products, Except Furniture - 20.3%
- Furniture And Fixtures - 34.9%
Tracking Cost of Goods Sold with Lido
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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