Cost of Goods Sold (COGS) -- or Cost of Service (COS) -- is a key concept in bookkeeping, particularly for businesses that sell products or materials. It refers to the direct costs associated with producing the goods and services your business sells. This includes the cost of materials, labor, and any overhead directly tied to production.

Why is COGS important? It directly affects your business's gross profit which are the remaining funds available to for general overhead expenses (such as rent, insurance, and utilities) and profit. To calculate COGS, add all of your job costs including inventory. This figure tells you what it costs to sell your product, helping you set accurate pricing, control expenses, and improve profit margins.

Roofing companies calculate Cost of Goods Sold (COGS) similarly to other businesses but with some industry-specific details. COGS for a roofing company typically includes direct costs tied to completing a roofing project, such as materials, labor, and subcontractor fees. Here's a step-by-step example:

1. Beginning Inventory: The value of roofing materials (shingles, nails, underlayment) on hand at the start of the period.

- Example: Your business has $8,000 in shingles, ridge caps, and trim in storage.

2. Purchases during the period: New materials purchased specifically for roofing jobs.

- Example: To complete a large job, you purchase $5,000 worth of additional materials.

3. Labor Costs: Direct labor expenses associated with the installation.

- Example: It cost $2,000 in W2 or 1099 wage to run the job, deliver materials, and run admin.

4. Subcontractor Costs: Payments to subcontractors hired for the roofing project.

- Example: You pay $7,000 in subcontractor fees for the installation.

5. Ending Inventory: The value of unused roofing materials left at the end of the period.

- Example: $1,000 worth of materials remaining.

### COGS Formula:

COGS = (Beginning Inventory + Purchases + Labor Costs + Subcontractor Costs) - Ending Inventory

### COGS Calculation:

COGS = ($8,000 + $5,000 + $2,000 + $7,000) - $1,000

COGS = $21,000

In this example, the roofing company's COGS is $21,000, representing the direct costs incurred in completing roofing projects during the period. This figure helps determine gross profit by subtracting COGS from revenue earned on those jobs. This number will help you decide what to charge your customer to cover COGS, overhead, and profit. It can also help with monitoring for improvement in efficiencies and changes in costs over time and has the added bonus of giving you the data you need to when negotiating rates with suppliers and labor providers.

Accurately tracking COGS in your bookkeeping helps you understand your business's profitability, makes tax reporting more precise, and provides insight into how efficiently you're managing resources. By staying on top of COGS, you can make smarter business decisions, ensuring that your bottom line remains strong.

Understanding COGS is vital for sustainable growth—be sure to consult with your bookkeeper to ensure it’s correctly calculated and recorded!

Need help tracking COGS for your business? Schedule a time for a free consultation at www.wisebookkeeper.com