Cost of Goods Sold (Cash) is a financial metric that calculates the direct costs incurred in producing goods or services sold during a specific period, reflecting the cash outflows related to inventory, manufacturing, and raw materials.
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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.
To calculate the cost of goods sold, you first need to determine the following:
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.
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:
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!
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:
More resources to help you reduce the cost of goods sold:
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Databox is a business analytics software that allows you to track and visualize your most important metrics from any data source in one centralized platform.
To track Cost of Goods Sold (Cash) using Databox, follow these steps:
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No, the cost of goods sold includes the direct costs associated with producing or acquiring goods or services sold, while production costs typically refer to the expenses incurred solely in the manufacturing or production process.
To analyze the cost of goods sold, you can review it in relation to revenue over time to determine trends and assess profitability. Additionally, comparing it to industry benchmarks and competitors can provide some useful insights into cost efficiency.
Cost of goods sold and cost of sales are essentially the same and represent the direct costs incurred in producing or acquiring the goods or services sold by a company. The terms are used interchangeably.
Email Clicks measures the number of times users click on a link or call-to-action within an email campaign sent by a business, indicating their interest and engagement with the content.
Net Operating Income (Cash) is a profitability metric that reflects the income generated by a business's operations after deducting operating expenses and taxes but before deducting interest and other non-operating expenses.
Net Income (Cash) is the total profit earned by a business after deducting all expenses that have been paid in cash.
The Cost of Goods Sold (Cash) by Subcategory metric measures the total amount of cash spent on producing goods categorized by subcategories, helping track expenses and determine profitability for specific product lines.
The Income (Cash) by Subcategory metric shows the total cash received by subcategories of income, allowing you to understand the sources of your revenue.
Balance by Credit Cards is a financial metric in QuickBooks that shows the total amount owed on credit cards as of a given date, including both current and past due balances.
Net cash provided by Investing activities measures the cash inflows and outflows related to investment activities during a given period, such as purchases and sales of fixed assets, investments in securities, and acquisitions.
Gross Profit Growth (Cash) measures the change in cash-based gross profit from one period to the next. It is found by subtracting the cost of goods sold (COGS) from total revenue and then comparing this figure between two periods.