Estimating Costs Of Goods Sold and Cost of Sales and Marketing
Let’s examine two key cost drivers: the cost of goods and services and Cost of Sales and Marketing
Estimating Costs of Goods and Services (COGS)
The cost of goods sold (COGS) is the direct cost of producing an organization’s goods or services. To estimate COGS, it is essential to understand the production process and the costs associated with each production stage. This may include:
Raw Materials: The cost of materials that are directly used in the production of each unit.
Direct Labor: Wages and benefits for workers directly involved in producing each unit.
Production Supplies: Supplies that are directly used in the production process, such as packaging materials and manufacturing consumables.
These costs increase or decrease based on the level of production or sales, making them an essential component in determining the total cost of producing each unit.
For example, if a company produces T-shirts, the COGS might consist of the cost of the fabric, thread, labels, packaging, and the cost of labour and production equipment. Understanding COGS is essential for creating a realistic cost model, as it helps identify the costs associated with each unit produced.
Early stage entrepreneurs with no experience of the production process can estimate the costs, by analyzing historical data, using industry benchmarks, or conducting market research.
COGS is calculated as follows:
For consumer goods:
COGS = Beginning Inventory + Purchases – Ending Inventory
Beginning inventory is the value of the inventory at the start of the period; purchases are the total cost of materials or products purchased during the period; and ending inventory is the value of the inventory at the end of the period.
For service or program providers:
COGS = Cost of Program Logistics (e.g venues, meals, travel) + Cost of Contractors (e.g. Speakers, designers, consultants) + Cost of Program or Service Management (e.g program managers, communications, M&E etc)
Estimating Sales and Marketing Costs
Cost of Sales and Marketing encompasses expenses related to sales and marketing efforts, such as advertising costs, salaries of marketers and salespeople, and other costs associated with customer acquisition and promoting and selling a product or service.
To identify sales and marketing costs, it is crucial to understand the target market and the most effective ways to reach them. This includes identifying costs related to advertising, sales promotions, public relations, and personal selling.
For example, if a clothing company wants to market its T-shirts, the marketing costs might include creating and distributing advertisements, attending trade shows, hiring sales staff, and sponsoring events.
To estimate sales and marketing costs, it is essential to understand the target market clearly and the most effective ways to reach them. For early stage entrepreneurs, this can be done by analyzing historical data, using industry benchmarks, or conducting market research.
Once the different sales and marketing costs have been estimated, they can be used to determine the total cost of promoting and selling a product or service. The formula for determining the total sales and marketing cost is as follows:
Total Sales and Marketing Cost = Advertising Costs + Sales Promotion Costs + Public Relations Costs + Personal Selling Costs