Cost of goods ratio (COGS): Definition, calculation and examples

Cost of goods ratio (COGS) is an important business indicator that measures the ratio of the cost of goods or materials to a company’s sales. It is presented as a percentage value and provides valuable insights into the efficiency of a company’s use of goods and materials management. This article explains what the cost of sales ratio is, how it is calculated and provides information about its importance for companies.

What is the cost of goods ratio (COGS)?

The cost of goods ratio provides information on the percentage of net sales accounted for by the cost of goods sold. It is primarily used in sectors such as the hotel, restaurant, retail and manufacturing industries to set the cost of goods consumed or sold in relation to the sales revenue generated. Efficient use of goods is crucial for a company’s profitability.

How is the cost of goods determined?

To determine the cost of goods, the consumption of the goods is first calculated. This is done by adding the opening stock and the goods receipts and then subtracting the closing stock according to the inventory. The resulting value, which may also include losses due to breakage or spoilage, is multiplied by the cost price to determine the monetary cost of goods.

How is the cost of goods ratio calculated?

This formula makes it possible to determine the percentage share of cost of goods in total sales.

What guidelines should I follow for the cost of goods ratio ?

Reference values may vary depending on the industry. In general, a COGS of around 30% should be aimed for, although lower values are better. The guideline value for drinks is a maximum of 25%. Deviations from these guide values may indicate inefficiencies and should be examined more closely.

Example:

Let’s go through a classic calculation example from the restaurant industry to calculate the cost of goods (COGS) of a fictitious restaurant that specializes in pizza.

Accepted data

Annual turnover from pizza sales: 150,000 euros
Initial balance of ingredients at the beginning of the year: EUR 5,000
Additions to ingredients over the year: 45,000 euros
Final stock of ingredients at the end of the year according to inventory: 4,000 euros

Steps for calculation:

Determination of the cost of goods:

First, we calculate the cost of goods based on the values available to us. The cost of goods is the value of the ingredients actually consumed to generate sales.
Calculation of the cost of goods (COGS):

The cost of goods ratio is then calculated by comparing the cost of goods sold to sales and expressing it as a percentage.

Calculation example:

Determination of the cost of goods:
Calculation of the cost of goods ratio:

Interpretation:

This means that 30.67% of turnover from pizza sales was spent on the purchase of ingredients. In the catering industry, a guideline value of approx. 30% for food is often regarded as a target-oriented cost of goods ratio. Our fictitious restaurant is therefore in this range, which indicates efficient cost control. However, constant efforts should be made to optimize the COGS, e.g. by negotiating better purchase prices or minimizing waste to further increase profitability.

Causes and measures in the event of deviations

An increase in the COGS can be attributed to various causes, such as higher purchase prices, a decline in sales or inefficient payment management. Depending on the cause, different measures can be taken, including price negotiations, price adjustments or optimizations in warehousing and purchasing planning.

Posting the cost of goods in german accounting

In accounting, the cost of goods sold is recorded as cost of materials in the income statement. The entry is made via the goods purchasing account (GRC) and the goods receipt account, whereby the balance of the goods receipt account is posted directly to the debit side of the P&L account.

Why is it so difficult to find quality, speed and price at the same time?

The cost of goods sold ratio is an essential key figure for companies to monitor the efficiency of their use of goods and materials. Continuous analysis and adjustment based on the COGS can lead to significant improvements in operational efficiency and profitability. Companies are recommended to regularly review their COGS and initiate optimization measures if necessary.

Do you want to optimize your cost of sales ratio or do you need support in identifying the cause of an excessively high cost of goods ratio? We are happy to support you. Contact us for a free initial consultation.