#Cogs formula how to
#Cogs formula drivers

Selling a higher volume than planned of higher-cost products will generate a high mix and have a negative impact on COGS.A higher or lower sales volume from plan will change the mix in comparison from plan and have a direct impact on COGS. This approach reflects the fact that not all products are created (i.e., sold ) equal. In this analysis, we’ll use budgeted price rate to better isolate actual rate differences and see the true mix impact. Mix variance is created whenever two or more products are included in a product group. With only one product type, variance would come from volume, not mix or rate. It’s important to note that mix variance will not exist when there is only one product type. The objective is not to compare total volume sold, but instead compare the distribution percentage, or weighting, across all the products that were sold in the time span. The purpose of mix variance analysis is to see how much of your total COGS variance is due to producing products at a volume different from what was initially planned. This will help us see the variances for each product type.ĬOGS Variance Component 2: Mix Variance Analysis

#Cogs formula drivers

To determine the key drivers behind the variances, we must first break down the volume sold by product type and analyze both budget and actual. Naturally, more or less units sold will drive COGS up or down accordingly and reflect on the profit and loss statement, which will result in a variance. (As a note, keep in mind that there is a latency between a unit that is produced and sold, which can be anywhere from 2-4 months due to logistics constraints, shipping time, customs, etc.) Therefore, an increase in sales volume equates to higher COGS, which will have a direct impact on gross margins and company profits. In our discussions here, we will be referring to the sales units produced, which drives COGS and appears on the profit and loss statement. Production units produced drives total cost of production (COP), which flows to the balance sheet until sold.

In the manufacturing industry, volume is most often used to either describe the level of production units produced or sales units sold. It also allows you to decompose the volume and pricing performances by product type between budgets and actual values.īefore we explore volume variance, let me first explain the meaning of volume. This should help you determine how costs changes are affected by multiple cost drivers.ĬOGS Variance Component 1: Volume Variance Analysisīreaking down the impacts that volume, mix and price have on COGS variance adds more complexity and enhances analysis.

#Cogs formula how to

Over the next few sections, I will outline how to calculate volume, mix and rate. It’s very likely that the impact of a COGS variance is driven by all three components. Based on the bill of material (BOM), these rates can affect some or all products and have a direct impact on overall costs, which would create a rate variance. These changes can occur, for example, with increases or decreases in vendor pricing on material purchases or in transportation and warehousing costs. Rate fluctuations happen for a variety of reasons and are typically unexpected.This mix change of 2% at the canned corn level creates an unfavorable cost variance, or as we say, mix variance. For example, let’s say we sold 100 cans of corn in the total sales volume of 1,000, or 10%, while the plan called for a sale of 8% of canned corn. Mix variance analysis looks at how the product is weighted, or distributed, amongst its total population. Mix occurs when a variety of products are sold at a different volume than planned.You will see when we talk more about volume variance analysis that as simple as this calculation may seem, you’ll need to take a few steps to separate out the mix component to truly see volume variance. Selling more volume of any or all products than planned will generate a volume variance and affect overall cost.Three main components make up a COGS variance: volume, mix and rates. Researching COGS variances without a complete understanding of where to look (or without the right tools) can lead you down long and time-consuming paths. Cost of Goods Sold (COGS) refers to the direct costs of all components used during the manufacturing process.