Understanding the Cost of Goods Sold and Operating Expenses in Procurement: A Comprehensive Guide
Procurement can be a complex process, and understanding the various costs involved is crucial for any successful business. Two of the most important factors to consider are the cost of goods sold (COGS) and operating expenses. If you’re unsure about what these terms mean or how to calculate them, don’t worry – this comprehensive guide has got you covered! By the end of this article, you’ll have a clear understanding of COGS and operating expenses in procurement and how they impact your bottom line. So let’s dive in!
What is the Cost of Goods Sold?
The cost of goods sold (COGS) is the direct cost incurred in producing or acquiring a product for resale. This includes the cost of raw materials, labor, and any other expenses directly related to production. Essentially, COGS represents the expenses that are directly tied to creating or purchasing a product.
Calculating COGS is essential for accurately determining a business’s profitability. By subtracting COGS from revenue, you can calculate gross profit – which tells you how much money your business makes after accounting for direct costs.
It’s important to note that indirect costs such as overhead and marketing expenses are not included in COGS calculations. These types of expenses fall under operating expenses instead.
One way to think about it is like this: if you sell t-shirts online, the cost of purchasing those shirts from your supplier would be considered part of your COGS. But things like website hosting fees or social media advertising wouldn’t be factored into this calculation since they aren’t directly related to producing the shirt itself.
Calculating accurate COGS figures allows businesses to make informed decisions when it comes to pricing products and managing inventory levels.
What are Operating Expenses?
Operating expenses are the ongoing costs that a business incurs in order to run its daily operations. These expenses can include rent, utilities, salaries and wages, supplies, marketing and advertising costs, insurance premiums and more.
One of the most significant operating expenses for a procurement department is staffing costs such as salaries and benefits for team members involved in purchasing activities. Another major expense is technology-related expenditures like software licenses or subscription fees.
It’s important for businesses to carefully manage their operating expenses as they can quickly add up over time and impact profitability if not controlled properly. To do this effectively it’s crucial to regularly review your organization’s spending patterns, identify areas where you may be overspending or underutilizing resources so that you can make necessary adjustments.
By managing your operating expenses effectively you’ll get better insight into how much money is going out versus coming in which will help ensure long-term success for any procurement department.
How to Calculate the Cost of Goods Sold
To understand the cost of goods sold (COGS), you need to know what it is. COGS refers to the direct costs associated with producing and selling products, including materials and labor. Calculating COGS involves determining the cost of each product sold during a specific period.
To calculate COGS, you first need to determine the beginning inventory for that period. This includes all products held at the start of that time frame. You then add any additional purchases made during that period to get your total inventory for that time frame.
Next, you need to subtract your ending inventory from your total inventory. Your ending inventory is simply all unsold products remaining at the end of that time frame. The resulting figure represents how much product was sold during that specific period.
Divide your total cost by the number of units sold to arrive at your COGS per unit. This calculation helps businesses determine their gross profit margin on each sale, which can inform pricing strategies going forward.
Calculating COGS accurately is crucial for businesses looking to stay competitive in today’s marketplaces while also maximizing profits on each sale they make through procurement processes- making it an essential part of business operations no matter how big or small!
How to Calculate Operating Expenses
Operating expenses are the costs incurred by a business to maintain its daily operations. This includes expenses such as rent, salaries and wages, utilities bills, office supplies, insurance premiums, marketing and advertising costs and any other administrative expenses for the business.
To accurately calculate operating expenses in procurement it is important to categorize them into two types: fixed operating expenses (FOE) and variable operating expenses (VOE).
Fixed Operating Expenses remain constant throughout a specific period of time regardless of changes in production or sales volume whereas Variable Operating Expenses change depending on fluctuations in production levels or revenue generation.
Once these categories have been established add up all the FOEs then list out all VOEs to calculate total variable cost. To calculate total monthly operating expense simply add together FOE with variable costs.
It’s important for businesses practicing procurement to keep track of their operating expenses every month as it helps identify inefficiencies within the organization which can be addressed through cost-cutting measures without affecting productivity.
Conclusion
Understanding the cost of goods sold and operating expenses is crucial for effective procurement management. By accurately calculating these metrics, you can gain insight into the financial health of your business and make informed decisions about purchasing and spending.
Remember to keep track of all incoming revenues and outgoing expenses to ensure that your calculations are accurate. Additionally, regularly reviewing these metrics over time will help you identify trends and patterns that can inform future budgeting strategies.
By taking a comprehensive approach to tracking costs in procurement, you’ll be able to optimize your operations for maximum efficiency and profitability. So don’t wait – start monitoring your cost of goods sold and operating expenses today!