Is Cost of Goods Sold a Variable Cost?
As a business owner, it is your responsibility to do your best to ensure that your business makes a profit. Without profit, it’s harder to grow, do better, and move forward. Therefore, it’s important to understand the Cost of Goods Sold (COGS) as it directly affects profitability. COGS is a crucial financial term that can help you run your business profitably, forecast and create an effective production process. Given how broad it is, you’ll want to know whether the cost of goods manufactured is a variable cost or a fixed cost. So, is cost of goods sold a variable cost? Keep reading to find out.
What is Cost of Goods Sold (COGS)?
Cost of Goods Sold (COGS), also called Cost of Sales, is an accounting term that measures the direct cost associated with producing a good or delivering a service. It is an essential metric for determining a company’s gross profit and gross margin. Businesses with higher COGS have a lower gross profit. This is because the gross profit is calculated by subtracting COGS from the revenue.
You can determine the gross margin by dividing gross profit by total revenue and multiplying the resultant number by 100. Therefore, business owners need to understand and manage COGS for them to run their businesses more efficiently and profitably.
What is a Variable Cost?
A variable cost is a business cost that changes in proportion depending on how much a company produces or sells. Typically, this is a cost that increases or decreases as the volume of production or sales increases or decreases. When a company’s production or sales increase, its variable cost increases. Variable costs in your company may include:
- Raw materials
- Direct labor
- Commission
- Utilities
- Shipping /freight costs
Variable costs are an important component of a company’s cost structure, as they can significantly impact profitability and pricing decisions. Unlike fixed costs, which remain fairly constant, variable costs can be adjusted quickly depending on the company’s situation. Generally, fixed and variable costs make up the total expenses of running a business.
Is Cost of Goods Sold a Variable Cost?
While COGS can include both fixed and variable expenses, it is generally considered a variable cost. This is because most of these costs vary in proportion to the level of production or sales. Some common fixed costs included in COGS may include factory overhead, equipment depreciation costs, and salaries.
Let AMB Performance Help
When running a business, COGS is among the many aspects that business owners should understand and manage. They will be required to interpret financial statements and reports, identify trends, monitor cash flow, and make strategic decisions based on financial data to run their business efficiently. Hopefully, now you understand the answer to, ‘is cost of goods sold a variable cost?’ But, now ask yourself: is your business operating at maximum efficiency? We can help you find out.
At AMB Performance Group, we can help you evaluate your business’s overall performance, and financial health, identify inefficiencies and develop strategies to help improve its performance and long-term success. Contact us today to start a comprehensive business health check.
