Formula
COGS = Beginning Inventory + Purchases – Ending Inventory
Calculation Example
If a company starts with $50,000 in inventory, buys $20,000 in materials, and has $30,000 left, COGS = 50,000 + 20,000 – 30,000 = $40,000
Data Source
Accounting records, financial statements
Tracking Frequency
Monthly, Quarterly, Annually
Optimal Value
Should be as low as possible while maintaining product quality.
Minimum Acceptable Value
High COGS reduces profit margins and affects financial sustainability.
Benchmark
Manufacturing ~50-70% of revenue, Retail ~60-80%
Recommended Chart Type
Bar chart (to compare COGS trends), Line chart (for industry benchmarks)
How It Appears in Reports
Displayed in income statements to calculate gross profit.
Why Is This KPI Important?
Essential for determining gross profit margins and overall profitability.
Typical Problems and Limitations
Does not include indirect costs like marketing and distribution.
Actions for Poor Results
Negotiate better supplier contracts, optimize inventory management, reduce waste.
Related KPIs
Gross Profit Margin, Revenue, Operating Profit Margin
Real-Life Examples
A retail chain lowered COGS by 15% by switching to local suppliers, increasing profit margins.
Most Common Mistakes
Excluding hidden costs, failing to account for inventory changes.
