The cost of goods sold (COGS) is the direct costs associated with the production of the goods that are sold by a company. These costs include the cost of the materials used to produce the goods, the cost of the labor used to produce the goods, and the cost of any other direct expenses associated with the production of the goods. The COGS does not include indirect expenses, such as marketing or shipping, and is typically calculated on a per-unit basis.
The COGS is calculated by adding up all of the direct costs associated with the production of the goods that are sold by a company.
The COGS has a direct impact on a company's profitability. The higher the COGS, the lower the company's profit margin will be. The COGS also has an indirect impact on a company's cash flow. The higher the COGS, the more cash a company will need to have on hand to pay for the direct costs of production. Additionally, the COGS has an indirect impact on a company's inventory levels. So the higher the COGS, the more inventory a company will need to have on hand to meet customer demand.
There are a number of ways a company can manage the COGS. One way is to reduce the direct costs associated with the production of the goods that are sold by the company. This can be done by using cheaper materials, using less labor, or reducing other direct expenses. Another way to manage the COGS is to increase the selling price of the goods. This will increase the company's profit margin but may also reduce customer demand. A company can also manage the COGS by reducing the number of goods that are sold. This will reduce the company's revenue but may also reduce the company's costs. Finally, a company can try to manage the COGS by increasing the efficiency of its production process. This can be done by using better technology or by better training its employees.
There are a number of best practices for managing the COGS. One best practice is to establish a COGS budget and track actual COGS against that budget on a regular basis. This will help a company identify areas where costs are higher than expected and take corrective action. Another best practice is to perform a regular review of the company's production process to identify opportunities for cost savings. Another best practice is to negotiate favorable terms with suppliers of raw materials and other direct costs. Finally, companies can invest in technology and employee training to improve the efficiency of the production process.