What is the cost of goods sold (COGS) and how can integrated FP&A help?

What is the definition of the cost of goods sold (COGS)?

The cost of goods sold helps organizations calculate how much it costs to produce a good, or provide a service, and is an important financial insight needed for other common financial calculations. 

By subtracting the cost of goods sold from total sales, you get your gross profit. When you subtract the cost of goods sold and all other expenses from your total sales, you get your net income.

The cost of goods sold can include direct labor, direct materials such as raw materials, and the overhead that's directly tied to a production facility or manufacturing plant. In simple terms, the cost of goods sold helps measure how much money goes into a sale from beginning to end.

The value of accurate COGS data

The cost of goods sold is a tax-reporting requirement and is key to succinct compliance. Organizations that make and sell products, provide services, or buy and resell goods need to calculate COGS to write off the expense, decreasing the total amount of taxes they need to pay. 

A higher cost of goods sold means a company pays less tax, but it also means a company makes less profit. The cost of goods should be minimized to increase profits.

To get financial information such as gross profit or net income the cost of goods sold must be worked out. Manually, this involves allocations of cost pools which can get quite complex. Historically, accountants have relied on spreadsheets, like Excel, to do these calculations for them, but in the digital world, there could be a better way.

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What is the cost of services?

Professional service organizations (PSOs) don’t provide goods but provide services instead. As a result, it is harder to allocate tangible costs like raw materials. PSOs will rely on the cost of services, rather than the cost of goods sold, but use this metric for the same reasons.

Organizations that offer both goods and services are likely to have both the cost of goods sold and the cost of services appear on their income statements.

If the cost of services is rising while revenue is leveling off or decreasing, this might mean that input costs are rising or that direct costs are not being managed properly. 

It’s clear that succinct and integrated financial planning and analysis software is necessary to get timely insights into the cost of goods or the cost of services.

Moreover, modern working conditions such as remote and/or global employment add another layer of complexity to this metric. As organizations need insight into the cost of sales/the cost of goods sold, they need a digital solution to help manage this complexity with accuracy, and to integrate with HR data.

Examples of cost of services/cost of goods sold

An example of the complexity financial teams may encounter in the calculation of the cost of goods sold/services is the cost allocation of an individual, especially an individual working remotely and/or globally, which is a trend occurring more and more.

Some potential costs could include:

• Salary
• Taxes
• Pension
• Benefits
• Remote or office worker
  • Office costs
  • Phone
  • Internet
  • Furniture
  • Global currency considerations
  • Global tax codes

How can technology help manage the cost of goods sold/services?

The cost of goods sold/services goes to show how financial data relies on the integration of many data sets from many other departments and teams.

As a result, organizations need to consider digitally transforming their financial processes in the Cloud to reduce the time and effort it can take to generate accurate cost of goods sold/services.

On the Cloud, finance professionals can work on the same document simultaneously in real-time, helping reduce data errors caused by version histories, and reducing security vulnerabilities encouraged by peer-to-peer sharing in legacy systems.

An integrated and Cloud-based FP&A solution can also provide automation capabilities thanks to intelligent AI. This can generate an accurate cost of goods sold/services automatically with speed, allowing financial professionals to focus on the analysis of the data.

Advanced reporting capabilities in the Cloud mean the data generated can easily be shared and organized in a timely fashion. Much of this relies on the integration of FP&A with other key ERP data sets from HR, procurement teams, and more.

With an integrated Cloud-based FP&A solution, finance teams can easily satisfy the complexity of the cost of goods sold/services in modern working conditions and use their financial function to analyze the data and inform strategy, rather than getting entrenched in manual calculations.

How can Unit4 help your organization with FP&A?

Our intelligent FP&A software solutions free your teams to spend more time delivering insights and creating value for the business. Our Integrated Financial Planning solution includes cost allocation functionality that supports these processes and helps manage complex calculations.

We use machine learning and AI to automate time-consuming data entry, report generation, and cost calculation, where it can draw all the data needed from a single source of integrated data.

Unit4 FP&A can be integrated with an ERP system to better connect strategy and planning with operations.  Unit4’s next-generation smart ERP software solutions are built for people in the business of helping people. With us, you can ‘Experience Real Purpose’ with an adaptable solution that’s right for you, now and in the future. 

To discover more, book a demo and see what our ERP or FP&A solutions can do for your organization.