Business Plan Help

Cost of Goods Sold (COGS) Help

 

Explanation of Terms: COGS (Per Unit)

Cost of Goods Sold refers to the actual cost of producing a product or service. Each inventory item may have a different cost associated with it. The worksheet includes spaces for seven different items, however you may use “cut and paste” to add as many as you will need. The costs of an item may include more than just the price of the item when you buy it, such as:

• Shipping costs to get the item to you, or to ship to a customer if you pay the shipping.
• Costs you pay to have the item assembled, either by employees or others.
• Costs associated directly with selling the item, such as sales commissions.

Generally all costs directly associated with the individual cost of the product that go up in price with the volume of sales of the product will be part of the Cost Of Goods Sold. For example, the following is the COGS for a “widget” that is bought in pieces, then assembled, and sold. The salesman that sells them receives a 10% commission. Each widget sells for $30 each (retail).

WIDGET COGS (Each)
Widget main body $ 3
Side pieces (2) @ $2 $ 4
Top Fin $ 1
Shipping* $ 1
Assembly Labor** $ 3
Commission*** $ 3
COGS $15

* To get all the parts shipped to the company from the suppliers costs approx. $1 per item. If parts are shipped in bulk you will need to divide the shipping charges by the number of parts to figure the actual cost per unit.

** It costs $3 each for an employee to fit the pieces together. In this case, an employee is paid $15 per hour and can assemble 5 widgets per hour, so the labor to produce each widget is $3 ($15 divided by 5 equals $3).

*** The salesman is paid a 10% commission on each widget sold. The widgets sell for $30 each, so he will receive $3 for each one sold.

Explanation of Terms: COGS Projections

If you have completed the Sales Projections section, the Cost Of Goods Sold (COGS) Projections will mirror the quantities you entered for each month but this time you will enter the COGS of each item.

As described in the Sales Projections section, most companies sell more than one product or service. Because the selling price and the cost to purchase or produce each individual item varies, there are seven different entry lines for the various items. If your business is a “Service Based” business, the items you are selling are probably “billable hours”, or the amount of time (on an hourly basis) that you can charge customers for. If different rates are charged for different services, each should be on a different entry line. The “quantity” will be the amount of hours charged for that particular service. An example: Bill’s Yardwork Inc. performs many types of service, and charges different prices depending on the service and therefore pays his employees different wages based on their ability to produce a particular service. In addition, there are other costs incurred in producing each service, so the Cost of Goods Sold varies for the different services. In the projection that follows he is using the following: Raking: Pays wages of $6 per hour (no other costs); Tilling: Pays wages of $8 per hour and the machine uses $2 worth of gas per hour making his COGS $10 per hour; Weeding: Pays wages of $6 per hour.

 

Bill’s Yardwork Inc.
Projected COGS Qty Jan Qty Feb Qty Mar Qty Apr
Raking 35 $210 41 $246 47 $282 36 $192
Tilling 10 $100 15 $150 15 $150 20 $200
Weeding 25 $150 25 $150 35 $210 35 $210
Total   $460   $546   $642   $602


If your company is selling goods, then the cost of each item will be listed. In the following example Bill now owns a bakery and he is selling: Pies @ $10 each, Tarts @ $4 each, and Cakes @ $13 each. His COGS for each product is: Pies: $5 each, Tarts: $2 each, and Cakes: $7 each.

Bill’s Bakery Inc.
Projected COGS Qty Jan Qty Feb Qty Mar Qty Apr
Pies 35 $275 41 $205 47 $235 36 $180
Tarts 10 $20 15 $30 15 $30 20 $40
Cakes 25 $175 25 $175 35 $245 20 $40
Total   $370   $410   $510   $465

 

Sometimes companies will break down sales by the various profit margins for particular type products. You may need to configure the amounts on a worksheet, then enter in the figures. These lines will correspond to the same lines under the Sales projections during the previous step to help accurately project income. Bill has now purchased an appliance business and has grouped the following because of the various profit margins: Stoves @ 40% profit margin, Refrigerators @ 25% profit margin, and Dishwashers @ 20% profit margin:

Bill’s Appliance Inc.
Projected COGS Qty Jan Qty Feb Qty Mar Qty Apr
Stoves 10 $2400 10 $2400 10 $2400 10 $2400
Refrigerators 10 $6000 15 $9000 15 $9000 10 $6000
Dishwashers 5 $700 10 $2800 10 $2800 10 $2800
Total   $9100   $14200   $14200   $11200

 

Explanation of Terms: COGS (Annual)

Annual figures for determining Cost of Goods Sold can be determined by the following formula:

Beginning Inventory plus Purchases (including shipping and direct labor costs)
less Ending Inventory = Annual COGS