Cost of Goods Sold Report

The cost of goods sold report or (COGS), is important because it along with the contribution margin gives a snapshot of profitability. This profit is before the company's administrative costs are added.

An overall report for the entire company would look something like this:

Beginning Inventory 10,000
Material Purchases 2,500
Direct Labor 1,200
Burden Costs 2,400
Ending Inventory 8,000
COGS 8,100 -8,100
Contribution Margin

COGS is beginning inventory + purchases + labor  + burden - ending inventory.

This report is usually a monthly report and should be available in the computer system.This company is showing a healthy contribution margin.

Parts Sold Sales Direct Labor Cost Material Cost Burden Cost Total COGS Contribution Margin %
Part #1 100 $8000 $800 $3000 $3800 $7600 $400 5%
Part #2 700 $1500 $150 $750 $1125 $2025 -$525 -35%
Part #3 50 $2500 $250 $800 $1000 $2050 $450 18%

This is a very good report if:
  • The burden allocations are fair and reasonable. 
    • Too many times individual parts will be unjustly tagged as big losers when the burden allocation rates are not accurate.
  • The material and labor inputs are up-to-date and accurate.

How to read the report:

The costs are at standard, that is, what the part should be using for costs.If your cost system is accurate and up-to-date then the report is good.

You can see that part 2 has a negative contribution. This needs to be investigated to find out why. Is the burden allocated properly? Is the sales pricing accurate? Material?

Maybe it's a bad job and wasn't priced well when the job was taken.

Contribution margin needs to allow room:
  • Contribution margin should be large enough to:
    • Cover administrative costs
    • Provide the profit desired