Cost of Goods Sold (COGS)

The cost of goods sold (COGS) signifies the total expense incurred in acquiring the products that a business sells. This figure represents the direct costs attributed to the production of goods or the purchase of inventory, appearing at the forefront of financial calculations when the products are sold. Essentially, COGS reflects the actual expense that a company pays to bring its products to market, encompassing not just the purchase price but also other related costs.

How to calculate your COGS

To accurately determine COGS, various methods can be employed, especially when products are purchased at different times and prices. One common method is the First-In, First-Out (FIFO) approach, where the cost of the earliest goods purchased is assigned to the cost of goods sold. Alternatively, the Last-In, First-Out (LIFO) method assigns the cost of the most recently acquired inventory to the cost of goods sold. Additionally, some businesses use a weighted average cost method to spread out the cost over all units sold.

Other costs to consider

Beyond the purchase price, COGS may also include ancillary expenses such as product handling, warehousing, and transportation costs associated with getting the products from suppliers to the warehouse. These additional expenses contribute to the total cost of bringing a product to market, impacting overall profitability.

How Dema can help

Using advanced tools like Dema, businesses can input costs at a granular level to gain more precise insights into their profit margins. Dema allows for detailed cost analysis by country, category, collection, and size, enabling companies to fine-tune their pricing strategies and inventory management. Accurate determination of COGS is crucial for assessing business profitability and evaluating the efficiency of inventory management processes, especially when material costs are consistent. This metric helps businesses understand their gross margin and make informed decisions to enhance their financial performance.