What are COGS (Cost Of Goods Sold)?

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What is the definition of Cost of Goods Sold (COGS)?

Cost of Goods Sold (COGS) refers to the total cost incurred by a business to sell a product or service. This includes the direct costs associated with the production and selling of goods, such as raw materials, labor, and packaging. However, it does not encompass indirect expenses like distribution costs, sales force costs, and marketing.

  • Raw materials: These are the basic components used in the production of goods. The cost of raw materials is a significant part of COGS.
  • Labor: This refers to the work done by employees involved in the production process. The cost of labor is another major component of COGS.
  • Packaging: This includes the cost of materials used to package the product for sale. Packaging costs are also included in COGS.

Why is COGS an important line item on an income statement?

COGS is a crucial line item on an income statement as it can indicate a business's financial performance, efficiency, and profitability. By tracking COGS, businesses can monitor expenses, lower taxable income, and calculate profitability.

  • Financial performance: COGS can provide insight into how well a business is managing its production costs.
  • Efficiency: A lower COGS can indicate a more efficient production process.
  • Profitability: Subtracting COGS from revenue gives gross profit, a key indicator of a business's profitability.

How is COGS calculated?

The formula for calculating COGS is: COGS = raw materials costs + labor costs + all other direct costs to make the products sold in the period. This calculation helps determine the direct costs associated with the production of the goods sold within a specific period.

  • Raw materials costs: The cost of raw materials used in the production of the goods.
  • Labor costs: The cost of labor used in the production of the goods.
  • Other direct costs: Any other costs directly associated with the production of the goods.

Where are COGS numbers usually included?

COGS numbers are typically included in Profit & Loss reports. These reports provide a comprehensive overview of a company's revenues, costs, and expenses during a specific period.

  • Profit & Loss reports: These are financial statements that summarize the revenues, costs, and expenses incurred during a specific period.
  • Financial statements: COGS is a crucial component of financial statements, providing insight into a company's cost management and profitability.

How can Secoda help determine COGS?

Secoda, as an AI-powered data catalog and documentation platform, can help businesses track their inventory and sales, which are essential for determining COGS. By consolidating data monitoring and observability into one central platform, Secoda can automate data discovery and documentation, making it easier for businesses to make informed decisions based on a single source of truth.

  • Data cataloging: Secoda can ingest metadata across all data sources, providing a comprehensive overview of a business's inventory and sales.
  • Data documentation: By automating data documentation, Secoda can streamline the process of tracking and calculating COGS.
  • Data governance: Secoda's ability to automatically identify and tag PII can help businesses maintain compliance while calculating COGS.

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