Effective Methods to Calculate Cost of Goods Sold (COGS)

The proper computation of Cost of Goods Sold (COGS) is one of the biggest steps in analyzing the financial performance of the company. Failure to track the COGS accurately runs the risk of skewed profit margins, ineffective pricing strategies and unseen inefficiencies that can cost them revenue. With careful monitoring of COGS calculations, institutions will have a clear understanding of their on cost, including raw materials, labor, and production overheads, and where there is possibility of cutting production costs.

In Saudi Arabia, COGS management is also very important in terms of ascertaining compliance requirements. Small companies are no longer relying on manual entries or work on old spreadsheets, and are instead relying on more intelligent solutions that enhance it in terms of accuracy and transparency. By adopting an efficient ERP solution, businesses will find it easy to calculate the cost of goods sold, and more importantly, keep up with the ZATCA regulations. The real-time tracking and automation of a ZATCA-compliant ERP solution enables businesses to optimise costs, increase profitability and increase financial transparency.

What is the Cost of Goods Sold (COGS)?

COGS (Cost of Goods Sold) is the total of all direct expenses incurred in producing or delivering a service. These are labor, raw material, and manufacturing overhead costs that are directly associated with production. As an example, a construction firm which uses SAR 100 000 in raw materials and SAR 50 000 in labour has a total COGS of SAR 150 000.

Once you know your COGS, you will be able to set desirable prices, you can determine the gross profit margin, and you can determine ways of cutting down the cost of production. Inaccurate tracking can expose businesses to over selling, under selling and even abiding with compliance regulations.

How to Calculate Cost of Goods Sold (COGS)?

The general definition of the formula on the calculation of cost of goods sold is:
OGS = Opening Stock + Purchases = Opening Stock

• Beginning Inventory: inventory on hand at the start of the period.
• Purchases: Raw materials or products acquired in the period.
• Ending Inventory: Inventory left in the end of the period.

As an example, a retail business that started the year with SAR 100,000 of inventory that it has bought another SAR 500,000 and ended the year with SAR 120,000 that has not been sold, its COGS would be:
COGS = 100,000 + 500,000 – 120,000 = SAR 480,000
This figure can guide the retailer on how much it spends to make sales and the efficiency of handling its inventory after making sales.

COGS Calculations Across Industries

1. Contracting – The key costs of production include the materials and labor.

2. Trading – Imports of inventory, supplies to supplier purchases are dominant to COGS.

3. Retail – High inventories of clothing or other consumer goods generate one of the best cost tracking features

4.Manufacturing – The costs of purchasing raw materials and staffing the factory is included in the environment of COGS.

5. Services – The difference between each of these sectors is that they need accurate cost of goods sold information that will help them monitor their margins and ensure that their operations become better.

What’s Included and Excluded in COGS?

DPF included in COGS:

• Raw materials
• Direct labor
• Inbound freight
• Warehousing and storage costs
• Factory cost

Excluded from COGS:

• Rent of office
• Marketing costs
• Salaries of the management
• Delivering to clients
• Interest charged

Categorising clears the air in terms of reporting all financial investments and staying within the set financial regulations.

Choosing an Accounting Method for COGS

The most usual ways are the following two ones:

• FIFO (First-In, First-Out): Oldest inventory comes first so it is helpful in fluctuating markets.
• LIFO (Last-In, First-Out), [newest perpetual inventory sold first]; advantageous when prices are stationary.

When a business in Saudi Arabia has an ERP system that is ZATCA- compliant; it is possible to force the system to automatically calculate these unless the data is inputted the wrong way around.

Smart Tips for Accurate COGS Calculations

1. Routinely keep up inventory records
2. Track all direct cost of the production in detail
3. Automate through the use of a trustworthy ERP system.
4. Watch price changes with seasons.
5. During COGS periodically, it is necessary to determine trends and inefficiencies.

How to Use COGS Data for Business Growth

The fact that correct COGS calculations are necessary in regard to compliance does not mean that they only apply to compliance. They can be used to gain insights about how to grow. Businesses can:

• Assess and utilize profit levels well
• Establish profitable and competitive pricing.
• Identify wastage in manufacturing.
• Be tax- compliant with an eye on ZATCA.
• Better your budgeting and forecasting through real time financial intelligence.

Why Choose Quickdice ERP for COGS Management?

Quickdice is one of the best erp software in saudi arabia, which simplifies operations of any business in the country. Here is how Quickdice can ease COGS management:

•  Automation of inventory and cost with the help of AI.
• ZATCA compliant ERP that will provide accurate reporting of taxes.
• Financial intelligence to make more intelligent decisions in real-time.
• Specific modules in the industry such as manufacturing, contracting, retail and services.
• Scalable cloud-based secure access that is suitable for a growing business.

By conjoining Quickdice ERP, companies can facilitate their calculation of the COGS, minimize inefficiencies, and meet the Saudi regulations, increasing their profitability.

Conclusion:

Learning how to Cost of Goods Sold (COGS) can be vital to a business that aims to enhance its profitability and keep the financial reporting in order. With an emphasis on accurate COGS estimations, companies have a chance to identify inefficiencies, minimize unneeded production expenses and price more intelligently. A clear picture of how expenditure is related to the commodities or services gives companies space to protect their margins and remain competent in the competitive market.

The best way in which this accuracy can be obtained is by use of modern ERP. Utilizing software such as ZATCA-compliant ERP system tools, businesses can automate everything inventory levels, make reporting easier and more efficient, and ensure every segment of the cost of goods sold (COGS) is properly reported. Quickdice is ranked among the most effective Saudi Arabia ERP software that enables companies to transition out of manual operations and adopt data-driven approaches resulting in long-term profitability and compliance.