Hey, you! Yes, you! Have you ever heard of COG?
Nope, not those little wheels with teeth!
COG in the business world stands for the Cost of Goods Manufactured, which is also written as COGM. It’s something you see often, and some sellers have never really given it much thought.
Let us explain what the COGM actually is.
Products don’t fall out of thin air. Each product you see out there in the market has gone through a process of manufacturing. Inventory was used to create it, and the total value of that inventory during the product process is referred to as a COGM, Cost of Goods Manufactured.
Generally, the following aspects are considered when calculating the COGM:
· Raw Materials: whatever was used to produce inventory
· Exerted Employee Effort: this is commonly referred to as “direct labor” and concerns the effort employees make to convert raw materials into the final inventory
· Factory Overhead: this refers to whatever cost that exists in a business which can’t be traced back to the inventory or service produced by the business
Basically, the COGM is the cost of the raw material used in creating a product/service, the effort of the people who made it, and the cost which you can’t directly link to the product or the inventory that was produced.
Let’s do a simple COGM calculation.
Imagine, if you will, that you’re a company which makes boxes and has made $25 worth of boxes.
You needed raw material to make them, which includes cardboard, glue, and staples. That cost you around $10. Then you need people to make the boxes out of the cardboard, glue, and staples. That cost you an additional $15. Again, these are just example numbers! Then you spent around $25 on other expenses, like utilities. So, if you put all of these numbers together, you’d get a total of $75, and that’s your Cost of Goods Manufactured, or, your COGM.
Why is COGM Important?
Businesses use COGM to compare the product cost of their products with the total amount of revenue they generate from selling those products. Obviously, if the COGM exceeds the total revenue, it’s not a good sign.
COGM is utilized to calculate the COGS. Uh-oh! Another abbreviation? It’s OK. It’s a relatively simple term. COGS stands for Cost of Goods Sold, which is basically what a business spends on all of the aspects in the production process, which includes labor, raw materials, and production costs.
By analyzing the COGM, a business can calculate how to approach different aspects of the production phase. Adjustments can be made, because everything can be analyzed separately. Are they spending too much on raw material? Or perhaps the employees working on the material? Can they reduce costs on factory overhead? These are all questions which can be assessed based on the COGM.
As you can see, the COGM is a pretty big deal for businesses, which is why they pay close attention to it. If you want more information on other aspects of business, such as business entities and sales tax exemption, we’ve got you covered at Prestige Auditors! Give our website a visit or book a call with us to have a chat about your business!