Financial modelling terms explained

Costs Of Goods Sold

Costs of goods sold (COGS) represent the costs involved in creating and selling products. These costs include the direct costs of materials used in production and the direct labor costs associated with production.

What Are Costs of Goods Sold?

The costs of goods sold (COGS) are the direct expenses incurred in the production of the goods sold by a company. These expenses include the cost of the materials used in production, the cost of labor, and the cost of any factory overhead. COGS are often called "direct costs" because they are directly related to the production of the goods. In order to calculate COGS, a company must first track the cost of the materials used in production, the cost of labor, and the cost of any factory overhead.

How Do You Calculate Costs of Goods Sold?

The cost of goods sold (COGS) is a calculation of the direct costs associated with producing or acquiring a product. This includes the cost of the materials used in the product, the cost of labor involved in production, and any shipping or handling costs. The calculation can be done on a per-unit basis or on a total basis for a company.

To calculate the COGS on a per-unit basis, you need to know the cost of each individual component that goes into the product. For example, if you are making a toy car, you would need to know the cost of the plastic, the metal, the paint, and the labor. You would then add these costs together to get the total cost of goods sold for a single toy car.

To calculate the COGS on a total basis, you need to know the cost of all the products that were produced or acquired in a given period of time. This includes the cost of the materials, the labor, and any shipping or handling costs. You would then add these costs together to get the total cost of goods sold for the company.

Why Is It Important to Know Your Costs of Goods Sold?

Knowing your costs of goods sold is important because it allows you to understand your company's profitability. By understanding your costs, you can identify which areas of your business are most and least profitable. Additionally, by understanding your costs, you can make more informed strategic decisions about where to allocate your resources and how to grow your business.

What's the Difference Between a Fixed Cost and a Variable Cost?

A fixed cost is a cost that does not change with respect to the level of activity or output of a business. A variable cost, on the other hand, is a cost that does change with respect to the level of activity or output of a business. For example, the cost of raw materials that a business purchases to produce its products is a variable cost, as it will increase or decrease depending on the level of production. Conversely, the rent for a business's office space is a fixed cost, as it does not change regardless of how much product the business produces.

What is An Example of a Costs of Goods Sold?

In a manufacturing company, the costs of goods sold (COGS) are the direct costs attributable to the production of the goods sold during a particular period. This includes the cost of the materials used in production, the cost of labor, and the cost of any other direct expenses incurred in the production process. In addition, the COGS calculation may also include a allocated portion of the indirect costs incurred in production, such as the cost of factory overhead.

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