QuickBooks Cost of Goods Sold (Cash)

What Is Cost of Goods Sold

Cost of goods sold is a fundamental financial metric that represents the direct costs a business incurs when producing or acquiring the goods or services it sells.
The metric encompasses all the expenses directly associated with the production, such as raw materials, direct labor costs, and manufacturing overhead.
Cost of goods sold is a critical metric for all businesses, but especially those involved in manufacturing, retail, or any industry that involves the sale of physical products.

How to Calculate Cost of Goods Sold

To calculate the cost of goods sold, you first need to determine the following:

• Opening inventory: The value of the inventory that a company has on hand at the beginning of an accounting period, typically at the start of a fiscal year or a specific reporting period.
• Purchases or manufacturing costs: The expenses incurred by a company to acquire or produce additional inventory during the accounting period.
• Closing inventory: The value of the unsold inventory that remains at the end of the accounting period.

Once you have these things, you can follow this formula:

COGS = Opening Inventory + Purchases or Manufacturing Costs – Closing Inventory

Suppose a company has an opening inventory worth $50,000 at the beginning of the year.
During the year, it purchases additional inventory worth $100,000 and incurs manufacturing costs of $30,000. At the end of the year, the value of the closing inventory is $40,000.
COGS = $50,000 (Opening Inventory) + $100,000 (Purchases or Manufacturing Costs) – $40,000 (Closing Inventory)

Once we apply the formula, we find that the cost of goods sold amounts to $110,000.

Remember that the calculation may vary depending on the specific accounting methods used, such as the first-in, first-out (FIFO), or the last-in, first-out (LIFO) method.

Additionally, you may need to factor in specific adjustments like work-in-progress inventory or freight costs.

What Is a Good Cost of Goods Sold?

When assessing whether your cost of goods sold is objectively good, the best thing you can do is compare your numbers with industry peers, historical data, and consider the overall profitability and efficiency of your operations.
But in case you’re struggling to find some more granular data on those, here are some general industry benchmarks that might be useful:

• Manufacturing industry: In the manufacturing sector, cost of goods sold tends to be higher due to the direct costs associated with production. A good benchmark can range from 60% to 80% of net sales, depending on the complexity and nature of the manufactured products.
• Retail industry: For retailers, the cost of goods sold primarily consists of the cost of purchasing inventory from suppliers. A common benchmark is around 60% of net sales.
• Service industry: In the service industry, where there is no physical inventory, the concept of cost of goods sold may not be as applicable. Instead, service-based businesses focus on other metrics such as labor costs, overhead expenses, and direct costs related to delivering services.
• Software and technology: For companies in the software and technology sector, the cost of goods sold is typically lower as the primary costs are related to research and development, rather than direct production or acquisition of physical goods. However, it can still include expenses such as cloud computing costs, licensing fees, or content acquisition costs. A general benchmark in this industry is 20% to 40% of net sales, but it highly depends on the specific business model and product offering.

And if you’re curious about more concrete numbers, here’s one interesting benchmark we pulled out from our product.

A good cost of goods sold in QuickBooks is from $15,000 to $30,000, according to QuickBooks Benchmarks for All Companies.

Remember that these benchmarks should be used as general references and that it’s much more important to consider industry-specific factors, company size, growth stage, and other relevant metrics when evaluating your cost of goods sold.

If you want to stay on top of future trends and be able to instantly compare your performance to companies just like yours (in any given industry), you can join our Benchmark Groups – it’s free for everyone!

How to Reduce the Cost of Goods Sold

Reducing the cost of goods sold leads to increased profitability, competitive advantage in the industry, more pricing flexibility, and overall better financial performance.

But finding the right ways to do it isn’t easy.

That’s why we prepared a few tips based on our interviews with hundreds of industry experts:

• Control overhead expenses: Evaluate and manage overhead expenses associated with production, such as utilities, rent, maintenance, and insurance costs. Look for opportunities to optimize energy usage, renegotiate leases, consolidate facilities, or explore cost-sharing arrangements. You can do this by creating detailed financial reports that clearly communicate all the relevant insights.
• Streamline supply chain management: Analyze and optimize your supply chain to eliminate bottlenecks, reduce lead times, and negotiate favorable terms with suppliers. You should also consider consolidating suppliers, implementing just-in-time inventory systems, and leveraging technology solutions for better inventory management.

More resources to help you reduce the cost of goods sold:

• How to Determine Markup Percentage for Small Businesses: What’s Good, Bad and Average?
• What’s a Good Profit Margin for a New Business?
• 4 Most Important Accounting Reports for Your Small Business
• 16 KPIs and Metrics You Should Include in a Retail KPI Dashboard