What is Cost of Goods Sold (COGS)?

Cost of Goods Sold (COGS) refers to the direct costs associated with producing or purchasing goods that a business sells during a specific period. It includes expenses such as raw materials, labor, and manufacturing costs, but excludes indirect costs like marketing, distribution, and administrative expenses.

COGS is a crucial financial metric for businesses in wholesale, retail, and manufacturing, as it directly impacts profitability and pricing strategies. Businesses using platforms like SimplyDepo can streamline inventory and cost tracking to optimize profitability and manage supply chain efficiency.

Why is COGS Important?

Tracking COGS helps businesses:

• Determine Gross Profit – COGS is subtracted from total revenue to calculate gross profit and assess business profitability.
• Optimize Pricing Strategies – Understanding production costs allows businesses to set profitable pricing.
• Improve Inventory Management – Keeping track of production and purchase costs helps businesses manage stock efficiently.
• Monitor Financial Health – A high COGS can indicate inefficiencies, leading to reduced profits.

How is COGS Calculated?

To calculate COGS, businesses consider:

1. The inventory they already had at the beginning of the period.
2. Any additional stock purchased or produced during the period.
3. The remaining inventory left at the end of the period.

The COGS is determined by adding the beginning inventory to new purchases and then subtracting the ending inventory.

Example Calculation:

Let’s say a bakery starts the month with $20,000 worth of ingredients and supplies. During the month, it purchases an additional $50,000 worth of materials. At the end of the month, it has $15,000 worth of ingredients left.

The cost of goods sold for the month would be $55,000, which represents the materials and supplies used to produce and sell baked goods during that period.

What is Included in COGS?

COGS includes all direct costs related to producing or acquiring goods for sale:
✔ Raw materials – Ingredients, parts, or components used in production.
✔ Labor costs – Wages for workers directly involved in production.
✔ Manufacturing costs – Factory expenses, such as utilities and equipment maintenance.
✔ Freight and shipping costs – If related to purchasing inventory.
✔ Storage costs – Warehouse expenses linked to inventory storage.

What is NOT Included in COGS?

✖ Marketing & advertising expenses – Promotional campaigns.
✖ Administrative costs – Office rent, salaries of managers, and customer support.
✖ Research & development (R&D) – Costs for developing new products.
✖ Distribution costs – Logistics and delivery fees to customers (not suppliers).

COGS vs. Operating Expenses

Many businesses confuse COGS with operating expenses (OPEX). The key difference:

• COGS includes only direct costs tied to producing goods.
• Operating expenses (OPEX) cover indirect costs like rent, salaries, and advertising.

For example, a bakery’s COGS includes flour, sugar, and baking wages, while OPEX includes rent, marketing, and office supplies.

How to Lower COGS and Improve Profit Margins

Businesses can reduce COGS without sacrificing product quality by:

1. Optimizing Supplier Costs

• Negotiating better prices with suppliers.
• Using wholesale management tools like SimplyDepo to track vendor costs and bulk discounts.

2. Improving Inventory Management

• Avoiding excess inventory to reduce waste and storage costs.
• Using inventory tracking solutions to optimize stock levels.

3. Enhancing Production Efficiency

• Reducing material waste in manufacturing.
• Investing in automation or bulk purchasing to lower unit costs.

4. Minimizing Freight & Logistics Costs

• Consolidating shipments to reduce transportation expenses.
• Using data-driven wholesale platforms like SimplyDepo to streamline order fulfillment.

COGS in Different Industries

COGS varies depending on the business model:

• Retail & Wholesale – COGS includes purchase costs from suppliers and freight expenses.
• Manufacturing – COGS includes raw materials, labor, and production overhead.
• E-commerce – COGS covers product acquisition, packaging, and shipping to fulfillment centers.
• Restaurants & Food Businesses – COGS includes ingredients, kitchen labor, and food preparation costs.

For wholesalers and distributors, tracking COGS accurately is critical for profitability. Platforms like SimplyDepo help businesses manage purchase orders, track supplier costs, and streamline pricing strategies.

Cost of Goods Sold (COGS) is a fundamental financial metric that helps businesses measure profitability, control costs, and set effective pricing strategies. By leveraging inventory management tools like SimplyDepo, businesses can track COGS efficiently, optimize supply chains, and maximize profit margins.