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As a manufacturing company, I know we need to track "cost of goods sold" separately from other supplies, but what is the rationale behind it?

Ryan Miller's Profile

cost of goods analysis

Answers

Anonymous
(Chief Financial Officer) |

Ultimately, if you want to determine product line and/or customer profitability it is essential. If you have one customer and one product then you have no need..

Mark Purintun
Title: Controller
Company: in-between
(Controller, in-between) |

In many manufacturing companies, Cost of Goods Sold relates to the standard cost of the products sold comprised of material, Direct Labor and Overhead costs. To arrive at Actual Cost of Goods Sold, you need to add back the variances generated by production operations such as Direct Labor over/under-spending, overhead over/under-spending and production variances for material, labor and overheads covering rate and usage. A good cost accountant can define these for management - and help management put additional margin on the bottom line, if done properly.

Properly presented in the Income Statement, these items will allow management to "see" the results of the sales process (Revenue), the costs of shipping the products (COGS) and the results of the manufacturing process that are not capitalized into inventory.

Note: if the manufacturing variances are too extreme, they will need to be adjusted into/out of inventory at year-end for proper internal reporting and for tax purposes.

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

You also want to track whether or not you are efficiently making the item.

By tracking the labor, all the raw materials items that went into the creation of the item (including additional raw materials due to damage during the process, i.e., you broke something, now you needed to use an additional $50 part) you can determine if not only person x is more efficient that person y, but if the process itself can be better managed.

Maybe you outsource production of sub-assembly "a" and save on production costs and get better quality.

You can't do this if you don't track the data.

Think costs (labor, material)
Think productivity (more units in the same time)
Think quality (better made product and less rejects do to poor workmanship)

Lower costs and better workmanship ultimately should enable you to position yourself better to sell your product either cheaper that the competition or to boast of the better quality which is worth a few more dollars (and profit).

Kay Flanery
Title: Senior Solutions Consultant
Company: JCS Accounting Business Solutions
(Senior Solutions Consultant, JCS Accounting Business Solutions ) |

Keep it simple... properly tracked, cost of goods sold, is the direct costs related to selling your product. Sales minus COGS = Gross Profit, a key metric in manufacturing. Industry comparisons will tell you how you manage compared to your competition. Operating expenses are those required to "keep the lights on". They occur whether you make the sale or not.

Topic Expert
Christie Jahn
Title: CFO
Company: Prime Investments & Development
(CFO, Prime Investments & Development) |

Let me ask this - if you don't keep direct costs related to the product separate from other costs how do you trend how the company is operating?

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