As a result, you can estimate the volume you’ll need to sell to cover your other costs. You’ll see exactly how much it costs to actually sell your product or service. How do you know if you’re charging enough to cover your costs? Knowing your COGS can help. Price it too low and you’ll have trouble breaking even. Price it too high and you might have fewer customers. It Helps You Make Accurate Pricing Decisions Tracking to see whether your gross profit margin increases or decreases over time can help you get a sense of the financial health of your business. That gross profit margin needs to be high enough to cover all of your indirect expenses, like marketing and salaries. Your gross profit margin tells you how much money you have remaining after paying for the product that you sold. Here’s why: It Can Be Used to Calculate Gross Profit MarginĪn important KPI for small business owners to track is their gross profit margin and you just need two numbers to calculate it: revenue and COGS. Taking time to sit down and calculate your COGS might fall to the bottom of your priority list.ĭon’t skip past calculating and understanding your COGS. There’s a lot to know when it comes to your financials, and you might be tempted to skip past a lot of it because you’re busy running a business. Ask yourself, “Would you have to pay this expense whether or not you sold anything?” If you’d need to pay for it regardless, it’s probably not a COGS. If you’re looking at your expenses and you’re still not sure which would be classified as a COGS, there’s a simple way to work through it. No matter how much you sell, your rent won’t change. This includes things like rent, utilities, and marketing costs. Soft costs not included in the cost of goods sold are recorded as overhead costs.Unlike COGS, operating expenses are indirect costs and don’t vary based on how much you sell. These may include vehicle expenses like gas and maintenance, phones, business insurance, and payroll burden (the employer-paid portion of payroll taxes and benefits). Indirect costs, or soft costs, are expenditures not directly related to construction. All of these are considered direct job costs and are included in the cost of goods sold. They include materials, subcontractors, wages for labor, and other expenses.įor example, direct costs include material purchases, subcontractor payments, wages for employee labor, and equipment rental fees. But construction companies incur other costs during the course of a project that are often attributable to a specific project.ĭirect costs, or hard costs, are costs that are related to performing work required to complete a project. In many industries, the cost of goods sold only includes expenditures directly associated with production of goods. Two types of costs are included when calculating COGS in construction: direct costs and indirect costs. What types of costs are included in COGS? This metric can be computed for a specific project to analyze its profitability, or it can be based on a company’s overall sales and costs to show profitability during a specific period. On a construction company’s financial statements, COGS is subtracted from total revenue to calculate gross profit margin. Depending on the accounting software used and the way the chart of accounts is set up, companies may call these “project costs,” “job costs,” or “construction costs.” For construction contractors, COGS includes any costs that are associated with the performance and completion of a project. Generally, “cost of goods sold” or COGS is the sum of expenses required in the production of a product. What is cost of goods sold in construction? Contractor tips for calculating cost of goods sold.What types of costs are included in COGS?. What is cost of goods sold in construction?.
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