But the cost of advertising the cake or delivering it to a customer would not be. COGS can therefore reveal areas where costs can be reduced or value can be added without negatively affecting the bottom line.įor example, if a bakery buys flour, sugar, and eggs to make a cake, and pays an employee to bake it, these costs – the ingredients and the labor – would be included in COGS. Because COGS excludes indirect costs such as marketing and distribution, it’s a useful measure to track the direct profitability of the business’s core purpose: making and selling goods to customers. This includes expenses such as raw materials, labor, and manufacturing costs. The cost of goods sold, or COGS, is the total direct costs accrued while creating a product or providing a service. This article will explain what cost of goods sold (COGS) is, its formula, how businesses can use COGS to keep a close eye on costs, and why it’s an especially crucial metric to SMEs. But to find the balance that works best for their customers, businesses should have a comprehensive understanding of their costs and profit margins, and calculating the cost of goods sold is a great place to start. Instead, striking a balance between cost-cutting and offering value can often be the best strategy. Businesses are often faced with a tough choice: buy cheaper materials to keep prices low, or focus on high-quality goods that can bring in higher profits? Both strategies can increase demand and ultimately support profitability, but the right solution may not be one or the other.
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