A little bit more about COGS:
COGS, short for “cost of goods sold,” is a critical component of your business’s financial health. It refers to the direct costs incurred in producing or acquiring the goods that you sell. These costs can include raw materials, manufacturing expenses, or the costs of other efforts needed to sell the product.
Now let’s consider a real-life example. The creative Emma designs and manufactures her own line of clothing. She loves fashion and honors sustainability and the environment. To calculate COGS, she takes into account the direct costs associated with producing her unique clothing items made of brand-new materials and 2nd hand materials.
- Materials: This includes the cost of fabrics, trims, buttons, and zippers.
- Manufacturing overhead: These are all the indirect costs incurred during the production process. It’s harder to calculate but it can include things like sewing machines and light bulbs used in the studio.
- Packaging and shipping: Emma sells her clothes online. She then works with a vendor that delivers her products in beautiful paper recycled boxes. Those are included in these costs.
- Duties and taxes: Emma also imports some of her exclusive fabrics from a vendor in Canada, and the customs duties are also included in her COGS. The taxes included in the COGS calculation do not include income taxes, only taxes on ray materials like sales tax.
- Costs of labor: Emma hires a freelancer seamstress who helps her from time to time. Her salary is included here.
Let’s assume Emma produced 1,000 dresses last year, and the costs incurred are as follows:
- Material costs: $10,000
- Manufacturing costs: $5,000
- Packaging and shipping costs: $2,000
- Duties and taxes: $1,500
To calculate the COGS, you would add up all the direct costs:
To make a profit, Emma must sell dresses at a price that’s higher than the COGS. If the cost of one or some of the components mentioned above changes, that means she might need to update the price of her products. By accurately tracking her COGS, Emma gains valuable insights into her business’s finances and can make informed decisions to drive growth–and make the world extremely stylish along the way.