COGS is the direct cost of the products a company sells. This includes the cost of materials, labor, and overhead. COGS is an important measure for companies because it helps them understand their production costs and profit margins. To calculate COGS, a company must first track all of its expenses related to producing and selling products. This can be a complex task, particularly for companies with multiple products and diverse supply chains.
How to calculate COGS:
Once a company has compiled all of its relevant expenses, it can calculate COGS by adding up the cost of materials, labor, and overhead. The resulting figure is the total cost of goods sold for the period in question. COGS is typically expressed as a percentage of revenue or as a per-unit cost.
COGS is an important metric for companies because it provides insight into their production costs and profit margins. By understanding how much it costs to produce and sell products, companies can make informed decisions about pricing, production levels, and other aspects of their business. Additionally, COGS can be used to assess the efficiency of a company's production process.