What is COGS?
Cost of Goods Sold (COGS) refers to the direct costs associated with goods or services that a business sells. It includes only the costs directly tied to the purchase of the goods. Items not linked to inventory are not considered in your COGS value. Manual inventory transactions are also considered within COGS calculations.
Formula for COGS:
COGS= Beginning Inventory + Inventory Purchases − Ending Inventory
Components of COGS:
Beginning Inventory – The value of inventory at the start of a period.
Purchases – The cost of additional inventory bought during the period.
Ending Inventory – The value of unsold inventory at the end of the period.
Using Known Costs
Another method we used to validate COGS is by referencing the known cost of the inventory item at the time of sale. If a sale occurs when the quantity on hand (QOH) is zero, the system applies the assumed cost in formula calculations, regardless of any later purchase orders or cost adjustments.
Why is COGS Important?
COGS is a key financial metric because:
It helps determine gross profit: Gross Profit= Revenue−COGS
It affects pricing strategies and profitability.
Investors and analysts use it to evaluate business efficiency.
Example Calculation
If a business has:
Beginning Inventory = $10,000
Purchases = $5,000
Ending Inventory = $3,000
Then,
COGS = 10,000 + 5,000 − 3,000 = 12,000
This means $12,000 worth of goods were sold during the period and this is your COGS.
What is COGS Percentage?
COGS Percentage reflects the proportion of your revenue spent on Cost of Goods Sold (COGS), providing insight into how efficiently your business manages production-related expenses.
Within your Shepherd admin inventory dashboard, the COGS% is currently calculated based solely on inventory-related sales. As a result, you may notice a higher COGS% compared to calculations that include both service and inventory sales, which could explain any perceived discrepancy if you previously used a combined sales approach.
COGS Percentage Formula
COGS Percentage = (COGS / Revenue) × 100
Example Calculation
If a business has:
COGS = $20,000
Revenue = $50,000
Then:
COGS Percentage = (20,000 / 50,000) × 100
COGS Percentage = 40%
What Does COGS Percentage Mean?
A higher COGS percentage means a larger portion of revenue is spent on production costs, which can lead to lower profit margins.
A lower COGS percentage means a business retains more of its revenue as gross profit, which is ideal for profitability.
How to Interpret COGS %
COGS % | Interpretation |
Below 40% | Excellent, high profit margin |
40% - 60% | Average, good balance |
Above 60% | High costs, lower profit margin |
How do I manually calculate my COGS % for total revenue in Shepherd?
Identify your COGS Values
To calculate your COGS you'll need three inventory values -
Starting and Ending Inventory Values
Using the inventory item report - select the date for the start of the time period you are evaluating
Reference and record the Grand Total Cost Value shown at the bottom of the table
Using the inventory item report again - now select the end date of the time period you are evaluating
Again, reference and record the Grand Total Cost Value shown at the bottom of the table
New Inventory Purchase Value
Using the purchase order history report - select the time period you are evaluating
Reference and record the Grand Total
Now you can calculate your COGS using the formula: COGS= Beginning Inventory + Inventory Purchases − Ending Inventory
Identify your Revenue Value
Using the invoice summary report, select the time period you are evaluating
Reference and record the Total Subtotal value
Reference and record the Discounts total value
Subtract the discounts total from your subtotal total to calculate your revenue
Now you can calculate your revenue using the formula: Revenue = subtotal total - discounts total
Calculate your COGS %
Use the calculated COGS, divide it by revenue multiplying by 100 to calculate your COGS %
COGS Percentage = (COGS / Revenue) × 100
We are continually enhancing our reporting capabilities, and a new Revenue and Expenses report will soon be available. This report is designed to mirror the core financial data typically presented in a traditional Profit & Loss (P&L) statement.
What Impacts My COGS% Accuracy?
Several factors can influence the accuracy of your COGS percentage. Understanding these can help you interpret your financial data more effectively:
1. Bundle Configurations with $0 Inventory Item Selling Price
If you use bundled configurations where:
A service item reflects the full selling price, and
An inventory item is included solely for quantity-on-hand tracking with a $0 selling price,
- this can inflate your COGS% artificially. In such cases, the cost is recognized without corresponding sales revenue from the inventory item, resulting in a higher-than-expected percentage.
2. Inventory Transactions Excluded from COGS%
Currently, inventory transactions are not included in COGS% calculations due to the unique and custom nature of how they're handled. While this can impact accuracy, their typically infrequent occurrence means they usually do not cause significant distortions.
3. Timing of Inventory Receipt and Cost Adjustments
If inventory is received after the sale and its associated cost is later modified, it may affect your COGS accuracy. At the time of sale, Shepherd uses:
An assumed cost, and
A First-In, First-Out (FIFO) costing method
- to determine COGS for formula calculations. Any subsequent updates to inventory cost will not retroactively adjust previously calculated COGS%.