Are you confused about the difference between Cost of Goods Sold (COGS) and Cost of Goods Manufactured (COGM)? Don’t worry, you’re not alone!
Understanding the differences between these two similar-but-not-identical terms can be tricky, however it’s a vital part of any manufacturing business’ inventory management strategy.
That’s why we’ve broken it down for you so that you can gain a better understanding of COGM vs. COGS. Read on to discover what makes them unique and how you can calculate and use these metrics to better understand your business.
What is COGS?
Let’s begin with COGS. COGS is short for “Cost of Goods Sold” and is a key metric for any business that manufactures or sells physical products.
So what is your Cost of Goods Sold? Your COGS include all direct costs of producing the goods that have been sold to your customers. Cost of goods sold is also commonly referred to as “cost of sales.”
COGS typically includes the cost of all the direct materials and external labor directly used to create the product that was sold.
It’s important to note that COGS usually excludes indirect (overhead) expenses. These are things like advertising or rent of warehouses and equipment.
What is COGM?
Another acronym often used in manufacturing circles is “COGM”. So, what is COGM and how does it differ to COGS?
The cost of goods manufactured (COGM) is a figure that represents the total cost of producing your finished goods. This includes the cost of raw materials, labor, and overhead expenses.
In contrast, the cost of goods sold (COGS) only includes the cost of raw materials and labor. It does not include overhead costs. COGM is often used as a measure of profitability because it provides a more accurate picture of the true costs associated with production.
However, it is important to keep in mind that COGM can also fluctuate from period to period, depending on the mix of products being manufactured.
As a result, COGM should not be used in isolation when making decisions about pricing or production levels.
The COGM formula
The formula for calculating your COGM is:
Value of opening work in progress
- cost of direct materials
- direct wages
- cost of production overheads
- closing stock of work in progress = Cost of goods manufactured (COGM)
Why is it important to understand the difference between COGS and COGM?
As you can see, COGS and COGM are calculated differently and have different usages.
COGM is mainly used to calculate the overall cost of producing a good or service before it is sold, while COGS captures only the cost of goods that have been sold or provided to customers.
COGM is good for analyzing your internal manufacturing processes and supply chains, whereas COGS is more beneficial in reporting your internal manufacturing expenses against your revenue.
How COGS can help you price your products better
Determining the right price for your product can be a tricky balance. You want to ensure that you’re making a profit, but you also don’t want to price yourself out of the market. One way to help strike this balance is to use your cost of goods sold (COGS) as a guide.
As we’ve discussed, COGS includes all the direct costs associated with producing your product, such as materials, labor, and shipping. By knowing your COGS, you can get a good sense of how much it costs you to produce each unit of your product.
From here, you can add on a markup that will cover your other expenses and generate a profit.
Of course, there are other factors to consider when pricing your product, but using COGS as a starting point can help you make sure that your prices are both fair and profitable.
See also: Pricing Psychology for Success »
How can I track my COGS?
Makers have a few different options regarding software that can help them track their COGS. One option is to use a spreadsheet, such as Microsoft Excel or Google Sheets. This method can be simple and straightforward, but it requires the seller to input all of the data manually. If your costs change for one or more of your materials, then you’ll need to recalculate pretty much everything all over again - which can be quite a time sink.
Another option is to use dedicated COGS tracking software, such as Craftybase. These programs automate much of the data entry process and generally offer more features than a spreadsheet, such as the ability to track inventory levels, generate real time pricing guidance and generate reports.
Ultimately, the best option for tracking COGS will depend on the needs of the individual seller however it is important to choose a solution that will grow with your craft business.
Craftybase - pricing and COGS management software for small manufacturers
Craftybase is a cloud-based pricing software solution that helps small manufacturers track their costs, calculate their COGS, and price their products for profit.
With Craftybase, you can easily add your materials, labor, and overhead costs, then see how these costs impact your COGS and final product price.
With Bill of Materials tracking, COGS and inventory management all built in, it’s the complete solution to your pricing woes. Try Craftybase for free today.