Why COGs are importants?
The COGS is an important metric on the financial statements as it is subtracted from a company's revenues to determine its gross profit. COGs have direct relation with the revenue of unit sales, This is also called Direct costs. COGS includes direct labor, direct materials or raw materials, and overhead costs for the production facility. If your direct costs are going up, you're earning less profit. It might be time to start looking for new suppliers or cut costs in your business.
Separating direct costs from other expenses(Operating expenses and Non COGs employee related expenses) also lets you understand your gross margin. This key metric, which appears in the Profit and Loss statement, is calculated this way:
Gross Margin = Revenue – Cost Of Goods Sold
Here are the five COGs models:
Constant Amount(Recurring Costs): Go with this cost model, when you have costs that appear on specific period of time(Daily, Weekly, Monthly, Quarterly or Yearly), Also you can specify percentage variation over time for these frequencies.
Per unit sales of product/service: Best to use when there may be some costs are directly associated to the unit sales of product or service or customer. Depending on your revenue stream model, Choose the Revenue Streams with unit sales of product, Recurring beginning or ending users as shown below.
% of overall Revenue or Specific revenue stream: This model will be forecast as a specified percentage of the overall sales for the revenue streams you select. % of Overall revenue or Specific revenue stream costs will fluctuate directly with sales in any given month
% of other cost of sales: Is your cost directly associated as a percentage of any other Cost of Goods Sold? Choose this option if you find such a nested relation between costs. Inherit one cost from another cost of sales.
Varying amounts over time: If none of above models are applicable, or you already have a detailed forecast in Excel or elsewhere, Choose this option to just enter overall cost values without any detail. Enter cost values directly into the excel sheet
Check out how to insert cost of goods sold values and see how the entries appear in various financial statements.