Cost of Goods
One key piece of information that every food product maker should know is how much it costs to manufacture one unit of product. Cost of Goods. Unit Cost. COGS. Cost of Goods Manufactured. Whatever you call it, determining (as accurately as possible) how much it costs to produce the food products you sell is essential for success in the food business. In this article we'll just call it "cost of goods".
Your cost of goods will include all costs your business incurs to produce the product and get it completely ready to sell. This includes the cost to purchase raw materials and the cost of processing them into a finished, saleable product. It can also include the cost of storage until sold and transporting finished products to the buyer.
Judgement and Estimates
When you go about determining your cost of goods, two concepts to keep in mind are judgement and estimates. Judgement is needed to decide what costs to include in your calculations. Estimates are required because one cannot possibly know, down to the penny, the exact amount of every single cost involved.
It's important to remember that we're talking estimating your cost of goods to the best of your ability. You can then use that information to make better business decisions such as setting your prices at profitable levels. Keeping tabs on your cost of goods is also helpful in managing costs and identifying savings opportunities as well as forecasting profit margins and break-even point.
Knowing your Cost of Goods is the starting point for a range of important business decisions such as setting prices, calculating profits, and determining your break-even point.
What to Include
Generally speaking, your cost of goods will include all materials (ingredients and other materials), labor, and, if possible, manufacturing overhead. In practice, cost of goods calculations may be easier to talk about than to do in real life. But it’s always better to estimate the cost of something and be slightly off than to ignore it altogether.
What Not to Include
When calculating cost of goods, don't include such things as marketing, administrative expenses, or anything else that's not used in manufacturing and packaging the product. Cost of goods should only include those things that are required to make the product and get it ready to sell.
Use this checklist as a starting place for what costs should be included when calculating your of cost of goods.
Variable Manufacturing Overhead
These are costs that change in proportion to the quantity of goods manufactured.
Fixed Manufacturing Overhead
These are costs that are not dependent on the quantity of goods manufactured.
Last Updated: 04/24/2020