Cost of Goods Sold (COGS) Formula | Calculation | Definition | Example
(in % of net sales) decreases pp to. % .. Formula 1 development driver Carmen Jordá. A rising name in her .. Managing Director in charge of Public Relations .. that the compensation meets the requirements of the German Stock Corporation Act (Aktiengesetz – AktG) and of perimeter grid. Inventory turnover is a ratio showing how many times a company has period by the inventory turnover formula to calculate the days it takes to sell Inventory turnover may also be found by dividing cost of goods sold with. That's why COGS is often the subject of fraudulent accounting. Expense Ratio of COGS; 5 How is Cost of Goods Sold Affected by Inventory Costing Methods?.
The purpose of dimensional weights is to allow the carriers to more effectively apply freight charges when very lightweight but bulky shipments occur. These lightweight but bulky packages can quickly fill up an airplane or trailer, yet not provide enough revenue based on weight-based fees to cover costs.
Dim weight Direct ship —direct shipping and drop shipping are two terms generally used interchangeably. They describe a process whereby three parties interact with the sales transaction the buyer, the seller, and the supplier. The buyer initiates a purchase from the seller, who then arranges with the supplier to ship the product directly to the buyer.
The seller does not carry inventory of the product and the supplier does not have any direct communication with the buyer. The buyer pays the seller and the seller pays the supplier. In the case of a "Blind" direct shipment, the supplier information is intentionally hidden from the buyer. Though both terms direct ship and drop ship are generally used to describe the same process, I've always considered a small distinction between the two that relates to where you are in the supply chain.
Sometimes the term drop ship also describes the process of shipping to any location that is different from the customer's normal shipping location. This subtle distinction is sometimes evident in the terminology used in software documentation.
Direct shipment, Drop shipment. This bypasses the retailers distribution network. In some cases this is more than just a delivery method, but also a vendor-managed inventory method whereby the supplier manages the inventory process, physically delivers and stocks the product on the retailer's store shelves.
Discrete manufacturing —describes manufacturing of distinct items items you can easily count, touch, see such as a pencil, a light bulb, a telephone, a bicycle, a fuel pump, etc. Discrete as opposed to Process manufacturing. Also see Process Manufacturing. Distribution —describes the process of storing, shipping, and transporting goods. Also describes the facilities distribution operations, distribution centers that conduct these activities.
In statistical analysis, describes the measurement of a group of events or occurrences see Normal distribution. DRP may be used for both distribution and manufacturing. DRP may also be defined as Distribution Resource Planning which also includes determining labor, equipment, and warehouse space requirements.
Dock leveler —device that provides a bridge to the trailer as well as a ramp to facilitate the transition in height from dock to trailer. Dock levelers are rated by weight capacity and by the service range.
The service range, also known as the height differential, rates the safe range above and below dock level you can use the leveler to transition to the trailer height. See also article Dock Safety Dock to stock —dock-to-stock has numerous meanings depending on the industry and context. Dock to stock often describes a program where materials are received into stock without any incoming inspection.
This often requires certification of suppliers to ensure they can adequately meet quality standards. Dock to stock may also describe a performance measurement where you track the time it takes for inbound receipts to get from the dock, through the receiving process, and to their stocking location with all transactions completed.
These are the two most common uses I have run into, but I have encountered other uses of the term. Double-deep rack —a type of pallet rack designed to be used with double-deep reach trucks that allow storage of palletized loads 2-deep in rack. Double-deep rack may be a unique design designed specifically for double-deep storage or may just be a double-deep configuration of standard selective pallet rack. Also see Reach truck and check out article on Aisle Widths.
DRP —Distribution requirements planning see separate listing Drive-in rack —racking system designed to allow a lift truck to drive into the bay creating very high density storage for non-stackable loads. FIFO is difficult to maintain in drive-in racking systems. Also see Racking Pics Page.
Drop ship —see Direct ship. Drum-handling attachments —describes the various designs of lift-truck attachment used to handle 55 gallon drums. Some are smaller versions of a paper roll clamp while others may engage the upper rim of the drum, or the lower rings. Some drum attachments are capable of picking up multiple drums at the same time. Dry storage —though dry storage can have other meanings in different industries, in warehousing it is typically used to describe non-refrigerated storage of food products canned goods, dry goods, etc.
Types of dunnage include loose fill packing peanutspapar, bubble wrap, foam, and air pillows. Duty —Duties are fees collected by customs authorities upon entry into a county. Duties are not the same as taxes, which may also be collected by the customs authority. Dynamic slotting —this is a term sometimes used by WMS providers to describe a higher level of slotting functionality. Unfortunately, there is not a standard definition for this, but it usually refers to the ability to change slotting recommendations as item profiles, order profiles, or other operational characteristics change.
In some cases it involves temporary slotting to support known orders items with many picks will be moved into a temporary slot by the order picker. Each —each or eaches refers to the units you are using either in physical processes or in your inventory system. In most cases eaches implies you are using the smallest possible unit of measure the individual pieces.
Economic order quantity —result of a calculation that determines the most cost effective quantity to order purchased items or produce manufactured items. The formula basically finds the point at which the combination of order cost and carrying cost is the least. The difficult part of implementing the formula is getting accurate values for order cost and carrying cost. Effective lead time —effective lead time represents a period of time that includes the lead time see Lead timeplus additional time factors that may occur between the time the need for an order in known, and the inventory is in stock and available.
For example, a fixed ordering schedule orders are only placed on specific days for specific vendors may add some time to the lead time, as may some internal processing. EPC is intended to be used for specific product identification. However, EPC goes beyond UPC by not only identifying the product as an SKU, but also providing access to additional data about the origin and history of the specific units. The EPC tag itself identifies the manufacturer, product, version, and serial number.
It's the serial number that takes EPC to the next level. This data is stored somewhere else the internet or other network but a standardized architecture allows you to access the data much like you would access a web page though this would be happening automatically behind the scenes. See my article on RFID for more info. Electronic data interchange —As the name implies, EDI is an electronic means of exchanging data. In inventory management, EDI is often used to exchange data such as purchase order details and advanced shipment notifications.
See Wikipedia page for EDI Enterprise resource planning —describes software systems designed to manage most or all aspects of a manufacturing or distribution enterprise an expanded version of MRP systems.
The modules are designed to work seamlessly with the rest of the system and should provide a consistent user interface between them. These systems usually have extensive set-up options that allow you to customize their functionality to your specific business needs.
Glossary of Inventory Management and Warehouse Operation Terms
EOQ —Economic order quantity see separate listing. Sprinkler system technology that executes faster and with a substantially greater volume of water. ESFR sprinklers may eliminate the need for in-rack sprinkler systems in many warehouses, thus reducing the cost of installation and, more importantly, the risk of water damage caused by damage to in-rack sprinklers. Retrofitting ESFR into older warehouses is not always feasible due to limited water pressure in old systems. Event management —software functionality that triggers specific actions based upon the occurrence of a specific event or combination of events.
This is another one of those terms used primarily by software vendors and consultants to push "new" technology. In reality, business software has been providing event-management functionality for years. If inventory dropping below a predetermined level reorder point triggers a message to a planner or even a listing on a reorder reportthis is essentially event management.
Excess Inventory —inventory quantities above a specific need. Some businesses may designate excess inventory as inventory beyond a certain time period of demand. For example, any inventory greater than 60 day's demand. Others may designate it as inventory beyond their current safety stock plus lot size order quantity. The second method assumes you have formulas for adjusting safety stock and lot sizes as demand changes.
This method basically calculates how much more inventory you have than you would have if you started with nothing and stocked based on current demand and ordering practices. You will generally use tolerances with the 2nd method. See also Obsolete Inventory Explosion-proof lift trucks —lift trucks designed to work in hazardous environments where highly combustible materials are present.
Vehicles are designed to avoid sparks and components reaching combustible temperatures. Special electrical systems and materials are used to achieve this. Exponential smoothing —forecasting method that is essentially a variation of a weighted moving average. The smoothing factor is a number between zero and one 0.
Extrusion —generally describes an item made of metal or plastic that is produced by forcing the raw material through a die extruding.
The result being a long item with a uniform shape throughout the length. Extrusions will often though not always require cutting and other machining processes to turn them into a finished item. Fast Charging —Method for quickly recharging lift truck batteries on the vehicle during short periods where the vehicle is not being used lunches, breaks, shift changes, etc.
This process for "opportunity charging" eliminates the need to change batteries in multi-shift operations. Fast charging requires special chargers called fast chargers. Fast chargers are significantly more expensive than standard battery chargers and there is still debate as to whether or not fast charging causes any harm to the batteries. The cost of the fast chargers can be offset by labor and equipment savings related to the elimination of changing batteries.
These would be products that the average consumer would frequently purchase such as soda, toothpaste, or dish soap. Fast pick —refers to fast moving items, or the locations designated for fast moving items. In warehousing describes the method of rotating inventory to used oldest product first. Actually an accounting term used to describe an inventory costing method. There are various ways of measuring fill rate. Order fill compares the number of orders shipped complete to the total number of orders shipped.
- Accounting Topics
Other examples of fill rates would include dollar fill rate comparing dollars shipped to dollars orderedunit fill rate comparing units shipped to units ordered. In fulfillment operations and some distribution operations where orders are generally shipped within 24 hours of receipt of order, fill rates reflect the ability to immediately ship from stock. In manufacturing operations and distribution operations that have lead-times for products, fill rates reflect the ability to ship to an agreed-to date.
Tolerances are sometimes used in fill rate measurements to allow lines or orders that are not shipped complete but are within the tolerance to be considered as "shipped complete". The tolerances may be based on units, dollars, lines, or dates shipped within certain tolerance of required date. Fixed lead time —a set lead time that doesn't change. Also see Lead time, Variable Lead time. Flex conveyor —portable conveyor that can be expanded, contracted, and flexed around curves. Floor load —a method of loading trucks, trailers, or containers where you load the goods directly on the floor rather than using pallets or other containers.
Floor loading tends to be very labor intensive, but provides the greatest opportunity for utilizing the full cube of the truck, trailer, or container. Floor stock —inventory that is consumed in production but is not tracked in the perpetual inventory system.
Floor stock is different from non-stock inventory since it does actually have an SKU number and item master record, but rather than tracking quantities in the inventory system, the materials are expensed as they are received Flow rack —racking system that incorporates sections of conveyor to allow the cartons or pallets to flow to the face of the rack.
Stocking is performed from the rear of the rack. Flue space —See Longitudinal flue space and Transverse flue space.
FMCG —Fast Moving Consumer Goods see separate listing Food-grade warehouse —A Food-grade warehouse is a warehouse that meets specific requirements for the storage of edible products or materials that will make up edible products ingredients or even packaging. To my knowledge, "food grade" is not a single designation or certification, but instead is a broad designation used to describe these types of facilities. And while there may be governmental requirements for food storage based on the location of the facility, actual "certification" of food grade is usually completed by private non-government organizations, and required based on the specific customer base being served.
For example, the industry you serve may require inspections and certification from AIB the American Institute of Baking.
Cost of Goods Sold (COGS)
The most visually notable feature of a typical food-grade warehouse is the inch wide white line painted on the floor following the entire perimeter of all walls in the facility.
This area must be kept clear and clean at all times primarily related to pest control. Forecast —A Forecast is an estimation of future demand. Most forecasts use historical demand to calculate future demand. Adjustments for seasonality and trend are often necessary. Forecasting is all about turning unknowns into knowns or reasonable approximations.
For more info on forecasting, check out my book on inventory management. Forecast consumption —describes the method s your inventory management software uses to reduce forecasted demand by the actual demand that occurs during the forecast period.
Incorrectly set up forecast consumption parameters or lack of functionality related to forecast consumption can often create serious problems with planning systems. Forecast error —the difference between the forecast quantity for a period and the actual demand experienced during that period.
Forecast error is calculated after the period has passed and is used to evaluate the forecast and make adjustments. Forging —generally describes an unfinished item made of metal that is produced through a process that heats the metal not to melting point then uses pressure or hammering to change the shape of the metal into a shape that closely resembles the finished item that will ultimately be made through machining processes from the forging.
We then add any new inventory that was purchased during the period. We only want to look at the cost of the inventory sold during the period. Thus, we have to subtract out the ending inventory to leave only the inventory that was sold.
Shane specializes in sportswear and other outdoor gear and requires a good supply of inventory to sell during the holiday seasons. Shane is finishing his year-end accounting and calculated the following inventory numbers: This information will not only help Shane plan out purchasing for the next year, it will also help him evaluate his costs. For instance, Shane can list the costs for each of his product categories and compare them with the sales.
This comparison will give him the selling margin for each product, so Shane can analyze which products he is paying too much for and which products he is making the most money on. The COGS definition state that only inventory sold in the current period should be included.
Both have drastically different implications on the calculation. The first unit purchased is also the first unit sold.
Going back to our example, Shane purchases merchandise in January and then again in June. The last unit purchased is the first unit sold. Thus, Shane would sell his June inventory before his January inventory. It also makes a difference what type of inventory system is used to count the purchases and sales. Most companies use one of two methods: If Shane used this, he would periodically count his inventory during the year, maybe at the end of each quarter.
If Shane only takes an inventory count every three months he might not see problems with the inventory or catch shrinkage as it happens over time.