Manufacturing Accounting: Busting the 80% COGS Myth and Unlocking Profitability
- Kevin Felton
- Jan 15
- 1 min read
In the world of manufacturing, a common belief persists: Cost of Goods Sold (COGS) will inevitably hover around 80%. But does this have to be the reality? Absolutely not. Strategic manufacturing accounting can be a powerful tool to challenge this assumption and unlock significant cost savings.
Understanding the COGS Breakdown
Before diving into cost reduction strategies, it's crucial to understand what comprises COGS. For manufacturers, this typically includes:
Direct Materials: Raw materials, components, and sub-assemblies used in production.
Direct Labor: Wages and benefits for employees directly involved in manufacturing.
Manufacturing Overhead: Indirect costs like factory rent, utilities, and equipment depreciation.
Challenging the 80% Benchmark
While 80% COGS might be the norm in some sectors, it's not an immutable law. By implementing strategic accounting practices, manufacturers can gain valuable insights and identify areas for improvement:
Activity-Based Costing (ABC): This method provides a more accurate picture of costs by assigning them to specific activities, revealing hidden expenses and areas of inefficiency.
Lean Accounting: Aligned with lean manufacturing principles, this approach focuses on eliminating waste, optimizing processes, and improving flow to reduce costs and increase efficiency.
Inventory Management: Implementing robust inventory control systems, such as Just-in-Time (JIT), minimizes holding costs, reduces waste, and improves cash flow.
Supply Chain Optimization: Negotiating better prices with suppliers, sourcing alternative materials, and streamlining logistics can significantly impact direct material costs.
Beyond the Numbers
By challenging the 80% COGS assumption and implementing these strategies, manufacturers can gain a competitive edge, boost profitability, and achieve sustainable growth.