{"id":2839,"date":"2021-06-11T08:50:21","date_gmt":"2021-06-11T15:50:21","guid":{"rendered":"https:\/\/www.logiwa.com\/?p=2839"},"modified":"2025-05-06T02:42:09","modified_gmt":"2025-05-06T09:42:09","slug":"cost-of-goods-sold","status":"publish","type":"post","link":"https:\/\/www.logiwa.com\/blog\/cost-of-goods-sold","title":{"rendered":"Cost of Goods Sold (COGS)"},"content":{"rendered":"<p>[et_pb_section fb_built=&#8221;1&#8243; admin_label=&#8221;section&#8221; _builder_version=&#8221;4.16&#8243; global_colors_info=&#8221;{}&#8221; theme_builder_area=&#8221;post_content&#8221;][et_pb_row admin_label=&#8221;row&#8221; _builder_version=&#8221;4.16&#8243; background_size=&#8221;initial&#8221; background_position=&#8221;top_left&#8221; background_repeat=&#8221;repeat&#8221; width=&#8221;auto&#8221; global_colors_info=&#8221;{}&#8221; theme_builder_area=&#8221;post_content&#8221;][et_pb_column type=&#8221;4_4&#8243; _builder_version=&#8221;4.16&#8243; custom_padding=&#8221;|||&#8221; global_colors_info=&#8221;{}&#8221; custom_padding__hover=&#8221;|||&#8221; theme_builder_area=&#8221;post_content&#8221;][et_pb_text ul_item_indent=&#8221;30px&#8221; admin_label=&#8221;Text&#8221; _builder_version=&#8221;4.22.2&#8243; background_size=&#8221;initial&#8221; background_position=&#8221;top_left&#8221; background_repeat=&#8221;repeat&#8221; hover_enabled=&#8221;0&#8243; global_colors_info=&#8221;{}&#8221; theme_builder_area=&#8221;post_content&#8221; custom_css_main_element=&#8221;.blog-toc ol, .blog-toc ul {||    list-style-type: decimal!important;||}||.blog-toc ul {||    list-style-type: disc!important;||}||||.blog-toc {||margin: 0!important;||}&#8221; sticky_enabled=&#8221;0&#8243;]This comprehensive guide will equip you with a deep understanding of the Cost of Goods Sold (COGS) and its significance for your business. By reading this article, you&#8217;ll learn how to calculate COGS, understand the differences between COGS and operating expenses, and explore methods to reduce your COGS, ultimately enhancing your business&#8217;s profitability.<\/p>\n<p><strong>Key Takeaways:<\/strong><\/p>\n<ul>\n<li>The Cost of Goods Sold (COGS) refers to the direct costs associated with the production of goods sold by a company. Calculating COGS is critical for setting prices, managing business budgets, and determining profitability.<\/li>\n<li>COGS can be calculated using the formula: Cost of Goods Sold = Beginning Inventory + Purchases During the Period \u2013 Ending Inventory. Different inventory cost methods like FIFO and LIFO can be used in the calculation.<\/li>\n<li>Understanding COGS provides valuable insights into a company&#8217;s efficiency and helps in strategic planning. It&#8217;s directly linked to a company&#8217;s revenues and has a major effect on profit margins.<\/li>\n<li>COGS and operating expenses differ in that the former pertains to costs directly tied to product manufacturing, while the latter refers to expenses not directly related to the production of goods and services.<\/li>\n<li>Reducing COGS can significantly increase profitability. Some strategies include leveraging lower-cost raw materials, buying in bulk, negotiating with suppliers, and researching alternative product suppliers.<\/li>\n<\/ul>\n<p>You need to know the <strong>cost of goods sold<\/strong> to calculate your business&#8217;s profits. Calculating and defining the cogs is an important factor in setting prices and managing your business budget. So <strong>what is the cogs?<\/strong>\u00a0How do you\u00a0<strong>calculate the cost of goods sold<\/strong> most easily? Why is the cogs a significant element for your business finances? Here is everything you need to know about the COGS and more.<\/p>\n<p><!--more--> <!-- Table of Contents --><\/p>\n<div class=\"blog-toc\">\n<p>Contents<\/p>\n<ol>\n<li><a href=\"#1\" rel=\"noopener\">What Is the COGS?<\/a><\/li>\n<li><a href=\"#2\" rel=\"noopener\">What Is the Universal Cost of Goods Sold Formula?<\/a><\/li>\n<li><a href=\"#3\" rel=\"noopener\">A Basic Cost of Goods Sold Example<\/a><\/li>\n<li><a href=\"#4\" rel=\"noopener\">6 Main Steps in Calculating Cost of Goods Sold<\/a><\/li>\n<li><a href=\"#5\" rel=\"noopener\">What Does the Cost of Goods Sold Tell Your Business?<\/a><\/li>\n<li><a href=\"#6\" rel=\"noopener\">Operating Expenses vs. Cost of Goods Sold: What&#8217;s the Difference?<\/a><\/li>\n<li><a href=\"#7\" rel=\"noopener\">Accounting for Cost of Goods Sold<\/a><\/li>\n<li><a href=\"#8\" rel=\"noopener\">How Can I Reduce the Cost of Goods Sold for My Business?<\/a><\/li>\n<\/ol>\n<\/div>\n<p><!-- In-Page Optin Box --><\/p>\n<h2 id=\"1\">What Is the COGS?<\/h2>\n<p>Also known as COGS, cost of sales or\u00a0<strong>finished goods inventory<\/strong>, cogs refers to the cost that comes with goods either manufactured or purchased and then sold. The cost of goods sold is considered a business expense; therefore, it has a major effect on how much profit the company has made. The <strong>COGS<\/strong> can find on the business&#8217;s income statement, one of the most critical financial reports regarding your company&#8217;s accounting operations. You can find the cogs under the categories &#8220;income&#8221; or &#8220;sales,&#8221; for which the income statement sets a report annually, quarterly, or monthly. But <strong>how to find the cogs<\/strong>\u00a0at a certain period? Luckily, there is a standardized formula.[\/et_pb_text][\/et_pb_column][\/et_pb_row][et_pb_row disabled_on=&#8221;off|off|off&#8221; module_class=&#8221;center-vertically&#8221; _builder_version=&#8221;4.22.2&#8243; _module_preset=&#8221;default&#8221; background_color=&#8221;#eef1f8&#8243; background_enable_color=&#8221;off&#8221; use_background_color_gradient=&#8221;on&#8221; background_color_gradient_stops=&#8221;#6717cd 51%|#0b0b0b 100%&#8221; width=&#8221;100%&#8221; module_alignment=&#8221;center&#8221; custom_margin=&#8221;42px|auto|45px|auto|false|false&#8221; custom_padding=&#8221;30px|40px|30px|40px|false|false&#8221; border_radii=&#8221;on|12px|12px|12px|12px&#8221; box_shadow_style=&#8221;preset1&#8243; box_shadow_vertical=&#8221;0px&#8221; box_shadow_blur=&#8221;10px&#8221; box_shadow_color=&#8221;rgba(74,75,109,0.09)&#8221; global_module=&#8221;3761&#8243; locked=&#8221;off&#8221; global_colors_info=&#8221;{}&#8221; theme_builder_area=&#8221;post_content&#8221;][et_pb_column type=&#8221;4_4&#8243; _builder_version=&#8221;4.22.2&#8243; _module_preset=&#8221;default&#8221; global_colors_info=&#8221;{}&#8221; theme_builder_area=&#8221;post_content&#8221;][et_pb_text _builder_version=&#8221;4.22.2&#8243; _module_preset=&#8221;default&#8221; header_3_text_color=&#8221;#ffffff&#8221; header_3_font_size=&#8221;30px&#8221; header_3_font_size_tablet=&#8221;30px&#8221; header_3_font_size_phone=&#8221;20px&#8221; header_3_font_size_last_edited=&#8221;on|phone&#8221; locked=&#8221;off&#8221; global_colors_info=&#8221;{}&#8221; theme_builder_area=&#8221;post_content&#8221;]<\/p>\n<h3 style=\"text-align: center;\">Request a free demo to learn more about Logiwa WMS.<\/h3>\n<p>[\/et_pb_text][et_pb_code _builder_version=&#8221;4.22.2&#8243; _module_preset=&#8221;default&#8221; text_orientation=&#8221;center&#8221; locked=&#8221;off&#8221; global_colors_info=&#8221;{}&#8221; theme_builder_area=&#8221;post_content&#8221;]<script charset=\"utf-8\" type=\"text\/javascript\" src=\"\/\/js.hsforms.net\/forms\/embed\/v2.js\"><\/script><!-- [et_pb_line_break_holder] --><script><!-- [et_pb_line_break_holder] -->  hbspt.forms.create({<!-- [et_pb_line_break_holder] -->    portalId: \"3469233\",<!-- [et_pb_line_break_holder] -->    formId: \"350e3ad2-eb09-46b1-9079-3f728ec2c0ea\",<!-- [et_pb_line_break_holder] -->    region: \"na1\"<!-- [et_pb_line_break_holder] -->  });<!-- [et_pb_line_break_holder] --><\/script>[\/et_pb_code][\/et_pb_column][\/et_pb_row][et_pb_row _builder_version=&#8221;4.16&#8243; _module_preset=&#8221;default&#8221; width=&#8221;100%&#8221; global_colors_info=&#8221;{}&#8221; theme_builder_area=&#8221;post_content&#8221;][et_pb_column type=&#8221;4_4&#8243; _builder_version=&#8221;4.16&#8243; _module_preset=&#8221;default&#8221; global_colors_info=&#8221;{}&#8221; theme_builder_area=&#8221;post_content&#8221;][et_pb_text ul_item_indent=&#8221;30px&#8221; _builder_version=&#8221;4.22.2&#8243; _module_preset=&#8221;default&#8221; global_colors_info=&#8221;{}&#8221; theme_builder_area=&#8221;post_content&#8221;]<\/p>\n<h2>What Is the Universal Cost of Goods Sold Formula?<\/h2>\n<p>The universal formula on\u00a0<strong>how to calculate the cogs<\/strong>\u00a0can be defined as follows:<\/p>\n<p><strong>Cost of Goods Sold = Beginning Inventory + Purchases During the Period &#8211; Ending Inventory<\/strong><\/p>\n<p>Another basic version of the\u00a0<strong>cost of goods sold formula<\/strong>\u00a0can be used as stated in the Balance Sheet:<\/p>\n<ul>\n<li>Beginning Inventory<\/li>\n<li>Plus Purchases and Other Costs (at the beginning of the period)<\/li>\n<li>Minus Ending Inventory<\/li>\n<li>Equals COGS (at the end of the period)<\/li>\n<\/ul>\n<p>The\u00a0<strong>COGS formula<\/strong>\u00a0can also be calculated using two methods: the accounting and inventory cost methods. The accounting method is the method required by the IRS for businesses to account for their inventory. However, this method contains a small exception that involves small businesses. Small businesses with an annual income of $26 million or less can choose not to keep an inventory and not use the accounting method for the past three years. On the other hand, the inventory cost method offers various calculation methods, including <a href=\"\/blog\/first-in-first-out-warehousing\" rel=\"noopener\">FIFO <\/a>and LIFO, which vary on the type of inventory the business is keeping.<\/p>\n<h3>A Basic Cost of Goods Sold Example<\/h3>\n<p>Let&#8217;s say the company has a $15,000 cost of inventory at the beginning of the year, has purchased $7,000 worth of material and products, and its ending stock has been listed as $8,000. In this case, the cogs can be calculated as follows:<\/p>\n<ul>\n<li>$15,000 (Cost of Inventory)<\/li>\n<li>+$7,000 (Cost of Purchases &amp; Other Costs)<\/li>\n<li>&#8211; $8,000 (Ending Inventory)<\/li>\n<li>= $14,000 (COGS)<\/li>\n<\/ul>\n<h3>6 Main Steps in Calculating COGS<\/h3>\n<ol>\n<li><strong>Determine direct and indirect costs:<\/strong>\u00a0The cost of goods sold calculation allows you to deduct the cost of products you sell, although you buy and re-sell them or manufacture them yourself. To determine the cost of direct and indirect expenses, you need to list all costs, including material, supplies, labor, and other similar costs.<\/li>\n<li><strong>Determine facility costs:<\/strong>\u00a0Facility costs are usually the hardest ones to determine. These usually include costs for buildings, rent or mortgage interest, utilities, and so on. An experienced tax professional can help you calculate your facility costs, considering tax percentages.<\/li>\n<li><strong>Determine the initial inventory:<\/strong> Merchandise in stock, work in progress, raw materials, supplies, and finished products are all considered a part of the inventory. An important tip while calculating your beginning inventory is to ensure that the beginning inventory this year must be the same as your <a href=\"\/blog\/ending-inventory\" rel=\"noopener\">ending inventory<\/a> last year.<\/li>\n<li><strong>Add purchases of inventory items:<\/strong>\u00a0Keeping track of the cost of each shipment and the total manufacturing cost for each product you add to your inventory is critical in determining this sum. Collecting <a href=\"\/blog\/how-to-make-an-invoice\">invoice<\/a>s and any similar paperwork that accounts for purchased products is a good way to keep track of your purchase inventory throughout the year.<\/li>\n<li><strong>Determine the ending inventory:<\/strong>\u00a0You can achieve the ending inventory costs by conducting a physical inventory check of your products or simply estimating. Keep in mind that it can also reduce damaged inventory or <a href=\"\/blog\/deadstock\" rel=\"noopener\">deadstock<\/a> from ending inventory costs.<\/li>\n<li><strong>Calculate your COGS<\/strong>: You now have all the information you need to set your\u00a0cogs calculator\u00a0in motion.<\/li>\n<\/ol>\n<h2>What Does the Cost of Goods Sold Tell Your Business?<\/h2>\n<p>The\u00a0<strong>cost of goods sold and inventory<\/strong> are two connection-oriented terms that go hand-in-hand when calculating a business&#8217;s gross profits. It is why calculating the cogs is an essential factor in determining its profitability. Since the cogs is subtracted from a company&#8217;s revenues, it helps measure the efficiency of the company and help come up with new strategies in planning labor, supply, and manufacturing process. The cogs is usually recorded as a business expense on the income statements because it is the cost of doing business. Having an exact estimation of the cogs helps managers, investors, and the finance department to forecast the company&#8217;s bottom line.<\/p>\n<p>So what does the cogs tell your business exactly? What happens when the cogs increases? It means that while the business will have less profit for its shareholders, this increase becomes beneficial for income tax purposes. Most companies try to keep their cogs as low as possible to keep their net profits high. Since the COGS is the cost of manufacturing or acquiring the products being sold, the only costs involved in the calculation are the ones that are directly correlated with the production of these products. In other words, COGS includes solely the direct cost of producing goods that customers purchased during a certain period.<\/p>\n<h2>Operating Expenses vs. Cost of Goods Sold: What&#8217;s the Difference?<\/h2>\n<p>A common question asked regarding the cogs is the difference between <strong>the cost of goods sold vs. expenses<\/strong>. By now, we know that\u00a0<strong>cost of goods sold is an expense<\/strong> and is listed in the company&#8217;s balance sheet. However, there are distinctive dividing lines between the cogs and operating expenses that need to be considered.<\/p>\n<p>Also known as OPEX, operating expenses refer to expenses that are not directly related to the production of goods and services. In contrast, the cogs comes from the sum of costs directly tied to the manufacturing of the products being sold. Rent, utilities, legal costs, and office supplies can be listed under OPEX. In contrast, the cogs includes materials needed to assemble a certain product or the transportation required to bring the products from a vendor to the retailer.<\/p>\n<h2>Accounting for Cost of Goods Sold<\/h2>\n<p>To make a quick recap,\u00a0<strong>the cost of goods sold equals\u00a0<\/strong>the sum of the beginning inventory cost and the purchases during the year, minus the cost of ending inventory. Both IFRS and US GAAP allow various policies for the cogs and accounting for your company&#8217;s inventory. There are for main calculation methods that can use to determine your inventory cost and cogs. FIFO (First-in-first-out), LIFO (Last-in-first-out), weighted average, and specified identification are the four methods you can choose from to account for your cogs and proceed to the tax process of the operation.<\/p>\n<h2>How Can I Reduce the Cost of Goods Sold for My Business?<\/h2>\n<p>Direct costs are probably one of the most problematic issues a company will face, regardless of the product it manufactures. Reducing the cogs and keeping them at the minimum throughout the years is a key element in increasing profitability and efficiency. Here are some of the various ways you can choose to balance out your cost of goods sold and achieve an effective cost-benefit analysis.<\/p>\n<ul>\n<li>Benefit from the lower-cost raw material when possible.<\/li>\n<li>Purchase in large amounts to receive bulk order discounts.<\/li>\n<li>Research suppliers that have various alternatives to your products can purchase them at the lowest possible cost.<\/li>\n<li>Negotiate with your suppliers and vendors for maximum cost-efficiency.<\/li>\n<\/ul>\n<p>Commonly referred to as the &#8220;pulse of the company,&#8221; the COGS is a significant metric that every business needs to keep track of and understand thoroughly carefully. The COGS is useful when used appropriately, both for external users, management, and basic <a href=\"https:\/\/www.logiwa.com\/industries\/ecommerce-inventory-management-software\" title=\"Inventory Management Software\">inventory management<\/a>. COGS can help evaluate how well the company is purchasing and selling its stock while benefitting overall profitability.<\/p>\n<p><strong>Related Terms<\/strong><\/p>\n<p><strong><a href=\"https:\/\/www.logiwa.com\/blog\/days-in-inventory-formula\">Days in Inventory Formula<\/a><\/strong><o:p><\/o:p><\/p>\n<p>Here is everything you need to know about the days in inventory formula, how to calculate it, and the ways to improve your inventory days formula to optimum levels<o:p><\/o:p><\/p>\n<p><strong><a href=\"https:\/\/www.logiwa.com\/blog\/average-inventory-formula\">Average Inventory Formula<\/a><\/strong><o:p><\/o:p><\/p>\n<p>The average inventory formula with all necessary definitions is here in Logiwa Blog. To learn more about how to calculate your average inventory, keep reading our article!<o:p><\/o:p><\/p>\n<p><strong><a href=\"https:\/\/www.logiwa.com\/blog\/total-cost-formula\">Total Cost Formula<\/a><\/strong><o:p><\/o:p><\/p>\n<p>The total cost formula is revealed in detail in Logiwa blog. Learn more about how to calculate the total cost formula, and see the benefits.<o:p><\/o:p><\/p>\n<p><strong><a href=\"https:\/\/www.logiwa.com\/blog\/economic-order-quantity\">Economic Order Quantity<\/a><\/strong><o:p><\/o:p><\/p>\n<p>The Economic Order Quantity model gives you the formula for better inventory management. Click and learn more about &amp;quot; What is economic order quantity?&amp;quot; and the EOQ formula now.<o:p><\/o:p><\/p>\n<p><strong><a href=\"https:\/\/www.logiwa.com\/blog\/minimum-order-quantity\">Minimum Order Quantity<\/a><\/strong><\/p>\n<p>Minimum order quantity is covered in thiis post! With the right minimum order quantity examples to MOQ formula, you can be an expert on cost-saving.<\/p>\n<p><strong><a href=\"https:\/\/www.logiwa.com\/blog\/delivery-exception\">Delivery Exception<\/a><\/strong><o:p><\/o:p><\/p>\n<p>The delivery exception is fully covered here in Logiwa Blog. What does delivery exception mean? How delivery exception in FedEx, USPS, and UPS occurs? Click and discover now!<o:p><\/o:p><\/p>\n<p><strong><a href=\"https:\/\/www.logiwa.com\/blog\/smart-order-routing\">Smart Order Routing<\/a><\/strong><\/p>\n<p>Smart order routing improves the efficiency of expensive order picking processes. This post gives you the tips about smart order router by replying What is smart order router?<\/p>\n<p><a href=\"https:\/\/www.logiwa.com\/blog\/dark-stores\"><strong>Dark Stores<\/strong><\/a><o:p><\/o:p><\/p>\n<p>The dark store concept, from the definition to the benefits is covered in Logiwa Blog. What is a dark store, finds the perfect answer in this article with related details.<o:p><\/o:p><\/p>\n<p><strong>\u00a0FAQs<\/strong><\/p>\n<p><strong>What is cost of goods sold (COGS)?<\/strong><\/p>\n<p>Cost of the goods sold (COGS), also known as cost of sales, is the collective expenses and costs related to the production or purchase of the goods and services that end up getting sold. COGS will include: the cost of purchased items, raw materials or parts used to manufacture of goods; direct labor costs; any supplies used in manufacturing and sales; overhead costs; container\/packaging costs; storage costs, trade discounts; and more! Expenses that are indirectly related to the production of the goods\/services will be excluded from COGS. For example, administrative and general expenses, capital expenditures, sales &amp; marketing expenses, etc. should not be included.<\/p>\n<p><strong>How do you calculate cost of goods sold (COGS)?<\/strong><\/p>\n<p>Cost of the Goods Sold Formula = (Initial Stock Value + Total Cost of Goods) \u2013 Final Stock Value<\/p>\n<p><strong>Should COGS include labor?<\/strong><\/p>\n<p>Yes, COGS\/COS includes direct labor costs, and any direct costs of materials used in producing or manufacturing a company&#8217;s products.<\/p>\n<p><strong>Can cost of goods sold be negative?<\/strong><\/p>\n<p>Ideally, no. Generally, the COGS is expected not to be positive. However, this does not mean that it can &#8220;never&#8221; be negative. In rare cases, the total of initial stock value and purchases can be lower than the final stock value. If your number of returns exceeds sales for a certain accounting period or there is a correction on the overstated costs from a prior accounting period&#8230; it is possible to have a negative COGS.[\/et_pb_text][\/et_pb_column][\/et_pb_row][et_pb_row _builder_version=&#8221;4.16&#8243; _module_preset=&#8221;default&#8221; global_colors_info=&#8221;{}&#8221; theme_builder_area=&#8221;post_content&#8221;][et_pb_column type=&#8221;4_4&#8243; _builder_version=&#8221;4.16&#8243; _module_preset=&#8221;default&#8221; global_colors_info=&#8221;{}&#8221; theme_builder_area=&#8221;post_content&#8221;][et_pb_code _builder_version=&#8221;4.18.0&#8243; _module_preset=&#8221;default&#8221; global_colors_info=&#8221;{}&#8221; theme_builder_area=&#8221;post_content&#8221;]<script type=\"application\/ld+json\">{\"@context\":\"https:\/\/schema.org\",\"@type\":\"FAQPage\",\"mainEntity\":[{\"@type\":\"Question\",\"name\":\"What is cost of goods sold (COGS)?\",\"acceptedAnswer\":{\"@type\":\"Answer\",\"text\":\"Cost of the goods sold (COGS), also known as cost of sales, is the collective expenses and costs related to the production or purchase of the goods and services that end up getting sold. 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If your number of returns exceeds sales for a certain accounting period or there is a correction on the overstated costs from a prior accounting period... it is possible to have a negative COGS.\"}}]}<\/script>[\/et_pb_code][\/et_pb_column][\/et_pb_row][et_pb_row _builder_version=&#8221;4.16&#8243; _module_preset=&#8221;default&#8221; global_colors_info=&#8221;{}&#8221; theme_builder_area=&#8221;post_content&#8221;][et_pb_column type=&#8221;4_4&#8243; _builder_version=&#8221;4.16&#8243; _module_preset=&#8221;default&#8221; global_colors_info=&#8221;{}&#8221; theme_builder_area=&#8221;post_content&#8221;][et_pb_code _builder_version=&#8221;4.18.0&#8243; _module_preset=&#8221;default&#8221; hover_enabled=&#8221;0&#8243; global_colors_info=&#8221;{}&#8221; theme_builder_area=&#8221;post_content&#8221; sticky_enabled=&#8221;0&#8243;]<script type=\"application\/ld+json\"><!-- [et_pb_line_break_holder] -->{<!-- [et_pb_line_break_holder] -->  \"@context\": \"https:\/\/schema.org\/\",<!-- [et_pb_line_break_holder] -->  \"@type\": \"HowTo\",<!-- [et_pb_line_break_holder] -->  \"name\": \"6 Main Steps in Calculating Cost of Goods Sold\",<!-- [et_pb_line_break_holder] -->  \"description\": \"This guide provides six main steps in calculating the Cost of Goods Sold, a key indicator of a company's profitability and efficiency.\",<!-- [et_pb_line_break_holder] -->  \"step\": [<!-- [et_pb_line_break_holder] -->    {<!-- [et_pb_line_break_holder] -->      \"@type\": \"HowToStep\",<!-- [et_pb_line_break_holder] -->      \"name\": \"Determine direct and indirect costs\",<!-- [et_pb_line_break_holder] -->      \"text\": \"The cost of goods sold calculation allows you to deduct the cost of products you sell, although you buy and re-sell them or manufacture them yourself. To determine the cost of direct and indirect expenses, you need to list all costs, including material, supplies, labor, and other similar costs.\"<!-- [et_pb_line_break_holder] -->    },<!-- [et_pb_line_break_holder] -->    {<!-- [et_pb_line_break_holder] -->      \"@type\": \"HowToStep\",<!-- [et_pb_line_break_holder] -->      \"name\": \"Determine facility costs\",<!-- [et_pb_line_break_holder] -->      \"text\": \"Facility costs are usually the hardest ones to determine. These usually include costs for buildings, rent or mortgage interest, utilities, and so on. An experienced tax professional can help you calculate your facility costs, considering tax percentages.\"<!-- [et_pb_line_break_holder] -->    },<!-- [et_pb_line_break_holder] -->    {<!-- [et_pb_line_break_holder] -->      \"@type\": \"HowToStep\",<!-- [et_pb_line_break_holder] -->      \"name\": \"Determine the initial inventory\",<!-- [et_pb_line_break_holder] -->      \"text\": \"Merchandise in stock, work in progress, raw materials, supplies, and finished products are all considered a part of the inventory. An important tip while calculating your beginning inventory is to ensure that the beginning inventory this year must be the same as your ending inventory last year.\"<!-- [et_pb_line_break_holder] -->    },<!-- [et_pb_line_break_holder] -->    {<!-- [et_pb_line_break_holder] -->      \"@type\": \"HowToStep\",<!-- [et_pb_line_break_holder] -->      \"name\": \"Add purchases of inventory items\",<!-- [et_pb_line_break_holder] -->      \"text\": \"Keeping track of the cost of each shipment and the total manufacturing cost for each product you add to your inventory is critical in determining this sum. Collecting invoices and any similar paperwork that accounts for purchased products is a good way to keep track of your purchase inventory throughout the year.\"<!-- [et_pb_line_break_holder] -->    },<!-- [et_pb_line_break_holder] -->    {<!-- [et_pb_line_break_holder] -->      \"@type\": \"HowToStep\",<!-- [et_pb_line_break_holder] -->      \"name\": \"Determine the ending inventory\",<!-- [et_pb_line_break_holder] -->      \"text\": \"You can achieve the ending inventory costs by conducting a physical inventory check of your products or simply estimating. Keep in mind that it can also reduce damaged inventory or deadstock from ending inventory costs.\"<!-- [et_pb_line_break_holder] -->    },<!-- [et_pb_line_break_holder] -->    {<!-- [et_pb_line_break_holder] -->      \"@type\": \"HowToStep\",<!-- [et_pb_line_break_holder] -->      \"name\": \"Calculate your COGS\",<!-- [et_pb_line_break_holder] -->      \"text\": \"You now have all the information you need to set your cogs calculator in motion.\"<!-- [et_pb_line_break_holder] -->    }<!-- [et_pb_line_break_holder] -->  ]<!-- [et_pb_line_break_holder] -->}<\/script>[\/et_pb_code][\/et_pb_column][\/et_pb_row][\/et_pb_section][et_pb_section fb_built=&#8221;1&#8243; disabled_on=&#8221;off|off|off&#8221; module_class=&#8221;recommended-content-callout&#8221; _builder_version=&#8221;4.22.2&#8243; _module_preset=&#8221;default&#8221; use_background_color_gradient=&#8221;on&#8221; background_color_gradient_direction=&#8221;0deg&#8221; background_color_gradient_stops=&#8221;#6717cd 0%|#2d6ef9 99%&#8221; background_color_gradient_start=&#8221;#63a2d9&#8243; background_color_gradient_end=&#8221;#3469b2&#8243; custom_margin=&#8221;0px||0px||false|false&#8221; custom_padding=&#8221;30px|30px|50px|30px|false|false&#8221; border_radii=&#8221;on|12px|12px|12px|12px&#8221; box_shadow_style=&#8221;preset1&#8243; box_shadow_vertical=&#8221;0px&#8221; box_shadow_blur=&#8221;10px&#8221; box_shadow_color=&#8221;rgba(74,75,109,0.09)&#8221; saved_tabs=&#8221;all&#8221; locked=&#8221;off&#8221; global_colors_info=&#8221;{}&#8221; theme_builder_area=&#8221;post_content&#8221;][et_pb_row _builder_version=&#8221;4.16&#8243; _module_preset=&#8221;default&#8221; width=&#8221;100%&#8221; custom_margin=&#8221;||20px||false|false&#8221; global_colors_info=&#8221;{}&#8221; theme_builder_area=&#8221;post_content&#8221;][et_pb_column type=&#8221;4_4&#8243; _builder_version=&#8221;4.16&#8243; _module_preset=&#8221;default&#8221; global_colors_info=&#8221;{}&#8221; theme_builder_area=&#8221;post_content&#8221;][et_pb_text _builder_version=&#8221;4.16&#8243; _module_preset=&#8221;default&#8221; header_2_text_align=&#8221;center&#8221; header_2_text_color=&#8221;#FFFFFF&#8221; header_2_line_height=&#8221;32px&#8221; custom_margin=&#8221;||0px||false|false&#8221; custom_padding=&#8221;||0px||false|false&#8221; custom_css_main_element=&#8221;text-align: center !important;&#8221; global_colors_info=&#8221;{}&#8221; theme_builder_area=&#8221;post_content&#8221;]<\/p>\n<h2 class=\"animated growIn slower go\" data-id=\"1\">Adjust quickly to ever-changing fulfillment requirements with the most flexible WMS.<\/h2>\n<p>[\/et_pb_text][\/et_pb_column][\/et_pb_row][et_pb_row column_structure=&#8221;1_3,1_3,1_3&#8243; use_custom_gutter=&#8221;on&#8221; gutter_width=&#8221;2&#8243; make_equal=&#8221;on&#8221; module_class=&#8221;blog-callout-tiles&#8221; _builder_version=&#8221;4.16&#8243; _module_preset=&#8221;default&#8221; width=&#8221;100%&#8221; locked=&#8221;off&#8221; global_colors_info=&#8221;{}&#8221; theme_builder_area=&#8221;post_content&#8221;][et_pb_column type=&#8221;1_3&#8243; module_class=&#8221;three-pl&#8221; _builder_version=&#8221;4.16&#8243; _module_preset=&#8221;default&#8221; background_color=&#8221;#FFFFFF&#8221; custom_padding=&#8221;30px|10px|60px|10px|false|false&#8221; box_shadow_style=&#8221;preset1&#8243; box_shadow_vertical=&#8221;13px&#8221; box_shadow_blur=&#8221;30px&#8221; box_shadow_color=&#8221;rgba(74,75,109,0.37)&#8221; global_colors_info=&#8221;{}&#8221; theme_builder_area=&#8221;post_content&#8221;][et_pb_text _builder_version=&#8221;4.18.0&#8243; _module_preset=&#8221;default&#8221; header_3_text_align=&#8221;center&#8221; header_3_text_color=&#8221;#413885&#8243; text_orientation=&#8221;center&#8221; global_colors_info=&#8221;{}&#8221; theme_builder_area=&#8221;post_content&#8221;]<\/p>\n<h3 style=\"text-align: center;\">3PL<\/h3>\n<p>Cloud 3PL software for high-volume fulfillment excellence<\/p>\n<p>&nbsp;<\/p>\n<p class=\"more\"><a class=\"read-more\" href=\"https:\/\/www.logiwa.com\/industries\/cloud-3pl-software\">3PL Software<\/a><\/p>\n<p>[\/et_pb_text][\/et_pb_column][et_pb_column type=&#8221;1_3&#8243; module_class=&#8221;warehouse-management&#8221; _builder_version=&#8221;4.16&#8243; _module_preset=&#8221;default&#8221; background_color=&#8221;#FFFFFF&#8221; custom_padding=&#8221;30px|10px|60px|10px|false|false&#8221; box_shadow_style=&#8221;preset1&#8243; box_shadow_vertical=&#8221;13px&#8221; box_shadow_blur=&#8221;30px&#8221; box_shadow_color=&#8221;rgba(74,75,109,0.37)&#8221; global_colors_info=&#8221;{}&#8221; theme_builder_area=&#8221;post_content&#8221;][et_pb_text _builder_version=&#8221;4.18.0&#8243; _module_preset=&#8221;default&#8221; header_3_text_align=&#8221;center&#8221; header_3_text_color=&#8221;#413885&#8243; text_orientation=&#8221;center&#8221; global_colors_info=&#8221;{}&#8221; theme_builder_area=&#8221;post_content&#8221;]<\/p>\n<h3 style=\"text-align: center;\">Warehouse Management<\/h3>\n<p>Modern digital cloud WMS powers a modern fulfillment experience<\/p>\n<p>&nbsp;<\/p>\n<p class=\"more\"><a class=\"read-more\" href=\"https:\/\/www.logiwa.com\/solutions\/digital-warehouse-management-software\">WMS Software<\/a><\/p>\n<p>[\/et_pb_text][\/et_pb_column][et_pb_column type=&#8221;1_3&#8243; module_class=&#8221;inventory-management&#8221; _builder_version=&#8221;4.16&#8243; _module_preset=&#8221;default&#8221; background_color=&#8221;#FFFFFF&#8221; custom_padding=&#8221;30px|10px|60px|10px|false|false&#8221; box_shadow_style=&#8221;preset1&#8243; box_shadow_vertical=&#8221;13px&#8221; box_shadow_blur=&#8221;30px&#8221; box_shadow_color=&#8221;rgba(74,75,109,0.37)&#8221; global_colors_info=&#8221;{}&#8221; theme_builder_area=&#8221;post_content&#8221;][et_pb_text _builder_version=&#8221;4.18.0&#8243; _module_preset=&#8221;default&#8221; header_3_text_align=&#8221;center&#8221; header_3_text_color=&#8221;#413885&#8243; text_orientation=&#8221;center&#8221; global_colors_info=&#8221;{}&#8221; theme_builder_area=&#8221;post_content&#8221;]<\/p>\n<h3 style=\"text-align: center;\">Inventory Management<\/h3>\n<p>Improve your inventory across your supply chain.<\/p>\n<p>&nbsp;<\/p>\n<p class=\"more\"><a class=\"read-more\" href=\"https:\/\/www.logiwa.com\/industries\/ecommerce-inventory-management-software\">IMS Software<\/a><\/p>\n<p>[\/et_pb_text][\/et_pb_column][\/et_pb_row][\/et_pb_section]<\/p>\n","protected":false},"excerpt":{"rendered":"<p>This comprehensive guide will equip you with a deep understanding of the Cost of Goods Sold (COGS) and its significance for your business. By reading this article, you&#8217;ll learn how to calculate COGS, understand the differences between COGS and operating expenses, and explore methods to reduce your COGS, ultimately enhancing your business&#8217;s profitability. Key Takeaways: [&hellip;]<\/p>\n","protected":false},"author":29,"featured_media":9641,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_et_pb_use_builder":"on","_et_pb_old_content":"<span data-preserver-spaces=\"true\">When pricing your products and services, determining the average\u00a0<\/span><strong><span data-preserver-spaces=\"true\">total cost<\/span><\/strong><span data-preserver-spaces=\"true\">\u00a0is an essential part of your accounting process. This step ensures you are pricing your products high enough to recover both your variable and fixed costs. The total cost formula helps businesses determine the total amount of expenses it takes to run the business.<\/span>\r\n\r\n<!--more-->\r\n\r\n<span data-preserver-spaces=\"true\">The\u00a0<\/span><strong><span data-preserver-spaces=\"true\">total cost formula<\/span><\/strong><span data-preserver-spaces=\"true\">\u00a0is an accounting equation that shows the cost per unit of the quantity that has been produced. It is calculated using two figures: the first figure represents the total production cost, whereas the second figure represents the quantity produced. The total cost of production is divided by the total amount paid in numbers, forming the\u00a0<\/span><strong><span data-preserver-spaces=\"true\">average total cost formula<\/span><\/strong><span data-preserver-spaces=\"true\">. A straightforward and easy-to-use procedure, the total-cost formula is calculated by dividing the total production cost by the number of products manufactured. Here is everything you need to know about the total-cost formula, how it works, the advantages of using it for your business, and the setbacks that may come with it.<\/span>\r\n\r\n<!-- Table of Contents -->\r\n<div class=\"blog-toc\">\r\n\r\nIn this guide, we\u2019ll help you understand:\r\n<ol>\r\n \t<li><a href=\"#1\" rel=\"noopener\">What is the Total Cost Formula?<\/a><\/li>\r\n \t<li><a href=\"#2\" rel=\"noopener\">How Does the Total Cost Formula Work?<\/a><\/li>\r\n \t<li><a href=\"#3\" rel=\"noopener\">Example of a Total Cost Formula Explained: A Step-by-Step Calculation<\/a><\/li>\r\n \t<li><a href=\"#4\" rel=\"noopener\">Advantages of the Total Cost Formula<\/a><\/li>\r\n \t<li><a href=\"#5\" rel=\"noopener\">Disadvantages of the Total Cost Formula<\/a><\/li>\r\n \t<li><a href=\"#6\" rel=\"noopener\">Things to Consider When Using the Total Cost Formula<\/a><\/li>\r\n<\/ol>\r\n<\/div>\r\n<!-- In-Page Optin Box -->\r\n<h2><span data-preserver-spaces=\"true\">What is the Total Cost Formula?<\/span><\/h2>\r\n<span data-preserver-spaces=\"true\">For the ultimate production planning and budgeting purposes, understanding the total cost structure of your business is quite important. Coming up with the total-cost formula is quite simple, as long as you can identify your variable and fixed costs accurately and can thoroughly name the number of goods you have produced.<\/span>\r\n\r\n<span data-preserver-spaces=\"true\">So\u00a0<\/span><strong><span data-preserver-spaces=\"true\">What is the formula for total cost<\/span><\/strong><span data-preserver-spaces=\"true\">? The total-cost formula helps derive the combined fixed and variable costs a batch of products creates. This formula can be summarized as follows: Average fixed price per unit plus the average variable price per unit, multiplied by the number of units. In other words, the total-cost formula looks like this:<\/span>\r\n\r\n<em><span data-preserver-spaces=\"true\">Total Cost = (Fixed Cost + Variable Cost) \/ Number of Units Produced<\/span><\/em>\r\n<h2><span data-preserver-spaces=\"true\">How Does the Total Cost Formula Work?<\/span><\/h2>\r\n<span data-preserver-spaces=\"true\">The total-cost formula allocates all the costs your business has endured throughout a specific period for the goods or services you have put on sale. The formula allows you to determine your profitability rate by calculating your business\u2019s entire expenses and dividing them by the organization\u2019s unit output. The formula also lets you know whether you need an adjustment in your pricing policy, reduced costs, or diversification to increase your profits.<\/span>\r\n\r\n<span data-preserver-spaces=\"true\">Once you are familiar with the total cost to produce an item within your inventory, it becomes easier to plan your pricing strategies in light of this information. The unit price may sometimes recover for the variable costs of manufacturing the items. However, suppose the <\/span><a style=\"font-size: 16px; font-weight: 300;\" title=\"Margin Calculator\" href=\"https:\/\/www.logiwa.com\/blog\/margin-calculator\">profit margins\u00a0<\/a><span data-preserver-spaces=\"true\">do not compensate for the fixed cost of marketing and other administrative expenses. In that case, it is safe to say that the business will not be viable for long. The total cost rises as fixed and variable costs increase, leading the company to decide whether to pass this extra cost to the customer or start trimming the sails.<\/span>\r\n\r\n<span data-preserver-spaces=\"true\">Most businesses benefit from the total-cost formula to calculate their overall efficiency and detect areas that could potentially bring savings on both fixed and variable costs. After measuring the company\u2019s <a href=\"\/blog\/reduce-costs-improve-warehouse-efficiency\" rel=\"noopener\">efficiency<\/a> and profitability with the help of the total-cost formula, businesses lean towards lowering variable costs by either moving into a factory with cheaper rent or buying materials from a cheaper vendor.<\/span>\r\n\r\n<span data-preserver-spaces=\"true\">Getting a full grasp of how the total cost is calculated is an essential part of the profitability process. It can also use the total cost formula to set prices and fulfill various marketing strategies. Businesses can develop their sales and marketing targets by comprehending how many items need to be sold to profit. This formula is a useful tool in identifying performing aspects of the business, as well.<\/span>\r\n<h2><span data-preserver-spaces=\"true\">Example of a Total Cost Formula Explained: A Step-by-Step Calculation<\/span><\/h2>\r\n<span data-preserver-spaces=\"true\">You can follow these five easy steps to answer the question of \u201c<\/span><strong><span data-preserver-spaces=\"true\">What is the total cost formula<\/span><\/strong><span data-preserver-spaces=\"true\">?\u201d and calculate your initial average total cost.<\/span>\r\n\r\n<strong>\u00a0 \u00a0 \u00a0 1. Identify your fixed costs.<\/strong>\r\n\r\n<span data-preserver-spaces=\"true\">Use your profit and loss account for this and identify your total fixed costs. Rent expenses, salaries, insurance bills, equipment costs, and other business-related utilities are considered fixed costs.<\/span>\r\n\r\n<strong>\u00a0 \u00a0 \u00a0 2. Determine your variable costs.<\/strong>\r\n\r\n<span data-preserver-spaces=\"true\">Like you did with the fixed costs, use your profit and loss account, to sum up, your variable expenses. These costs could include direct labor, delivery and <a href=\"\/blog\/shipping-cost-calculator-and-how-to-reduce-shipping-costs\" rel=\"noopener\">shipping cost<\/a>, raw material costs, and sales commissions.<\/span>\r\n\r\n<span data-preserver-spaces=\"true\">\u00a0 \u00a0 \u00a0<strong>3.Calculate your total cost of production.<\/strong><\/span>\r\n\r\n<span data-preserver-spaces=\"true\">It calculates the total cost of production by adding up the total fixed and variable costs. This part is represented in the total cost formula as follows: (Total fixed cost + Total variable cost)<\/span>\r\n\r\n<span data-preserver-spaces=\"true\">\u00a0 \u00a0 \u00a0<strong>4.Identify the number of units produced.<\/strong><\/span>\r\n\r\n<span data-preserver-spaces=\"true\">It is the number representing the units manufactured throughout the specific period.<\/span>\r\n\r\n<span data-preserver-spaces=\"true\">\u00a0 \u00a0 \u00a0<strong>5.Calculate your average total cost.<\/strong><\/span>\r\n\r\n<span data-preserver-spaces=\"true\">By dividing the total cost of production (step 3) by the number of units you have manufactured (step 4), you will be able to achieve the average total cost.<\/span>\r\n<div id=\"integrations\" class=\"dark-blue-bg\">\r\n<div class=\"container\">\r\n<div class=\"row\">\r\n<div class=\"col-md-9 mx-auto\" align=\"center\">\r\n<div class=\"integrations-intro\">\r\n<div class=\"animatedParent\" data-sequence=\"500\"><\/div>\r\n<\/div>\r\n<\/div>\r\n<\/div>\r\n<div class=\"row\">\r\n<div class=\"col-lg-4 col-md-6\">\r\n<div class=\"animatedParent\">\r\n<div class=\"integration-box animated growIn go\">\r\n\r\n\u00a0\r\n\r\n<\/div>\r\n<\/div>\r\n<\/div>\r\n<\/div>\r\n<\/div>\r\n<\/div>\r\n<h2><span data-preserver-spaces=\"true\">Advantages of the Total Cost Formula<\/span><\/h2>\r\n<span data-preserver-spaces=\"true\">Using the formula bears many advantages for businesses of any size. The most important benefit that the\u00a0 formula provides is that it allows for a simple and clear understanding of the profitability of a business. It can be easily recognized, and the calculations necessary in determining the <a href=\"\/blog\/demand-forecasting-retail\" rel=\"noopener\">profitability margins<\/a> can be quickly measured and tracked.<\/span>\r\n\r\n<span data-preserver-spaces=\"true\">It can also compare the formula over time to define whether the business needs a review of its pricing or sales strategies. It is important to keep track of the total cost in every single product line a company owns. The total cost formula evolves into a handy benchmarking tool and helps evaluate the performance of the business, therefore designate its position in the market. This formula comes in handy when conducting competitor analyses by determining its place in the market compared to its rivals and whether or not it needs to lower or increase its prices accordingly.<\/span>\r\n\r\n<span data-preserver-spaces=\"true\">When used as an internal tool, the total cost formula acts as a profitability tracking method, giving a quick overview of a specific product line\u2019s performance. It especially becomes useful when outsourcing certain elements of the manufacturing process or negotiating with suppliers. By making the margins clear, the total cost formula provides transparency to external vendors and similar third parties.<\/span>\r\n<h2><span data-preserver-spaces=\"true\">Disadvantages of the Total Cost Formula<\/span><\/h2>\r\n<span data-preserver-spaces=\"true\">The total cost calculation is a relatively simple formula to understand, especially for businesses with limited products and can clearly distinguish between their suppliers and manufacturing methods. However, an estimated total cost can turn into a rather cumbersome process for companies with various product lines. As the costs that need to be included in the formularise, the more complex it becomes to allocate these costs efficiently to come up with a total.<\/span>\r\n\r\n<span data-preserver-spaces=\"true\">Businesses with constantly changing supplies find it harder to develop their fixed prices derived from a formula requiring the variable fees to be calculated first. The variable cost element of this equation then needs to be regularly adjusted to keep up with seasonal and unexpected price changes.<\/span>\r\n\r\n<span data-preserver-spaces=\"true\">Since utilities and material costs can vary in unforeseeable ways, using the total cost formula as a forecasting tool may not always serve the most accurate predictions. Using the total cost formula as a predictor relies mostly on reasonably foreseeable increases and decreases in the costs of each element within the process. The same goes for pricing strategies as well, where the total cost-based pricing planning depends on being able to adapt to price changes constantly, which is not always possible.<\/span>\r\n<p class=\"in-content-optin\">Request an online inventory management system demo and see why thousands of companies are using <a href=\"\/demo\" rel=\"noopener\">Logiwa<\/a>.<\/p>\r\n\r\n<h2><span data-preserver-spaces=\"true\">Things to Consider When Using the Total Cost Formula<\/span><\/h2>\r\n<span data-preserver-spaces=\"true\">It is important to be aware of the numerous issues that may arise with the use of the formula, such as:<\/span>\r\n<ul>\r\n \t<li><strong><span data-preserver-spaces=\"true\">Variable purchasing costs are volume-based.<\/span><\/strong><span data-preserver-spaces=\"true\">\u00a0When purchasing raw material for the manufacturing process, the price per unit will change following the volume discounts. Therefore, the more units you order, the lower your variable per-unit cost will be.<\/span><\/li>\r\n \t<li><strong><span data-preserver-spaces=\"true\">The total-cost formula offers a limited range for average fixed costs.<\/span><\/strong><span data-preserver-spaces=\"true\">\u00a0Fixed costs entail expenses that only apply within a narrow volume range. Since the same fixed charges apply across a wide range of unit volumes, the average static cost figure will not be as \u201cfixed\u201d as you would presume.<\/span><\/li>\r\n \t<li><strong><span data-preserver-spaces=\"true\">Direct labor is considered a fixed cost.<\/span><\/strong><span data-preserver-spaces=\"true\"> Since usually a fixed number of people are needed to work on a production line, the direct labor costs are considered a fixed cost. It should integrate them into the formula accordingly. There are only a few cases in which direct labor varies directly by the production volume.<\/span><\/li>\r\n<\/ul>","_et_gb_content_width":"","content-type":"","inline_featured_image":false,"_lmt_disableupdate":"no","_lmt_disable":"no","footnotes":""},"categories":[42,56,33],"tags":[],"class_list":["post-2839","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-ecommerce","category-supply-chain","category-warehouse-management"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v19.1 (Yoast SEO v25.2) - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Cost of Goods Sold (COGS) | Logiwa | WMS<\/title>\n<meta name=\"description\" content=\"What is the cost of goods sold? How to calculate COGS? Why is cost of goods sold formula important? 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