How do you calculate COGS and Landed COGS?
Calculating your cost of goods sold (COGS) and landed cost of goods sold (Landed COGS) is crucial for understanding the profitability of different products. By understanding these costs, you can make informed pricing, promotions, and profitability decisions.
Calculating COGS
COGS is the direct cost of producing your product, including the cost of raw materials, packaging, and direct labor used in the production process. Brands need to account for all costs associated with creating the product, and it's important to note that not all costs will be direct costs. Indirect expenses, such as rent, utilities, insurance, and equipment depreciation, are also necessary when calculating COGS.
To calculate COGS, you must determine the total direct and indirect costs of producing your product, accurately representing how much it costs to make the product. You can then use this information to determine the price at which you should sell the product to ensure that you're making a profit.
Calculating Landed COGS
Landed COGS is the total cost of getting your product to its final destination. This includes the cost of transportation, duties, taxes, and other fees associated with delivering your product to your customers. Calculating Landed COGS is important for understanding the total cost of your product, and it can help us make more informed decisions about pricing and profitability.
To calculate Landed COGS, we need to add the total cost of getting your product to its final destination to your COGS. This will give us an accurate representation of the total cost of producing and delivering your product. It's important to note that Landed COGS will vary depending on the destination of your product, as well as the mode of transportation and any associated fees or taxes.
Landed Cost Per Unit
Once you have calculated your Landed COGS, you can determine the landed cost per unit. Landed cost per unit is calculated by dividing the total landed cost by the number of units produced. This information can help determine the price you should sell to ensure you're making a profit.
It's important to remember that the landed cost per unit will vary depending on a variety of factors, including the cost of raw materials, the cost of labor, and the cost of transportation. You need to regularly review and adjust these calculations to ensure that they remain accurate and up-to-date as your business evolves and market conditions change.
Monitoring and Adjusting
It's essential to review and adjust your COGS regularly and Landed COGS calculations. We need to ensure that you're accurately accounting for all costs associated with producing and delivering your product.
You can use your COGS and Landed COGS calculations to identify areas where we can reduce costs. For example, if you find that your raw material costs are too high, we can look for ways to reduce these costs, such as negotiating with suppliers or finding alternative sources for your raw materials. By regularly monitoring and adjusting your COGS and Landed COGS calculations, you can ensure that you're maximizing your profitability.
Avoiding common mistakes with calculating COGS
When calculating their COGS, many companies make common mistakes that can lead to inaccurate or incomplete data. Here are some of the most common mistakes to avoid:
Failing to include all direct costs: Companies may overlook some direct costs associated with producing their product, such as the cost of raw materials, packaging, and direct labor. It's essential to carefully consider all the expenses related to creating the product so that the COGS is accurate.
Ignoring indirect costs: Indirect costs such as rent, utilities, insurance, and depreciation of equipment are often overlooked when calculating COGS. These costs can have a significant impact on the profitability of the product, so it's essential to include them in the calculation.
Incorrectly allocating overhead costs: Companies may also make the mistake of misallocating overhead expenses. Overhead costs should be given to products based on the percentage of direct labor hours or machine hours used for each product rather than just being divided evenly among all products.
Not accounting for the cost of waste and scrap: Companies often overlook the cost of waste and scrap when calculating COGS. It's essential to include these costs in the calculation, as they can significantly impact the product's profitability.
Forgetting to adjust for inflation: COGS should be adjusted for inflation to ensure that the product's cost accurately reflects the current market conditions.
Failing to include the cost of freight and duties: The cost of transporting the product and any associated duties and taxes should be included in the calculation of Landed COGS. Failing to include these costs can lead to an inaccurate representation of the total cost of the product.
Not accounting for seasonality: Companies may overlook the fact that the cost of raw materials or transportation may vary based on the season. For example, the shipping cost may be higher during the holiday season due to increased demand. It's essential to account for these seasonal variations when calculating COGS and Landed COGS.
Avoiding these common mistakes is essential for calculating an accurate and reliable COGS and Landed COGS.
How are you calculating your COGS?
Calculating COGS and Landed COGS is crucial for understanding the profitability of your products. By accurately accounting for all costs associated with producing and delivering your product, you can make more empowered pricing, promotions, and profitability decisions. It's important to regularly review and adjust these calculations to ensure that they remain accurate and up-to-date as your business evolves and market conditions change and that they are trending in the right direction over time.
At Turbine, we're building an all-in-one platform for managing inventory and finances. From cutting a purchase order through customer fulfillment, we integrate with all the tools you're already using to centralize and track the product at every step in the supply chain.
If you're ready for COGS calculation, it's time to consider Turbine. We'd love to chat. Sign up for our waitlist, or drop us a note at hello@helloturbine.com