Cogs is directly proportional to the number of units of goods sold right? So if we have fewer sales in terms of number of units, the. cOGS should also decrease, correct?
(edited)
Amortization of machinery is COGS? Seriously? Jesus...
Get Active in Our Amazing Community of Over 452,000 Peers!
Schedule mock interviews on the Meeting Board, join the latest community discussions in our Consulting Q&A and find like-minded Case Partners to connect and practice with!
Cogs and units sold
Overview of answers
Upvotes
Best answer
Hi!
"Cogs is directly proportional to the number of units of goods sold right? " --> No, that's wrong! COGS is related to the number of units PRODUCED! Usually it is correlated, but it's still an important distinguishment and it shows whether a candidate is a rigorous thinker or not!
Cheers, Sidi
P.S.: I see a couple of comments here saying that COGS includes fixed costs. From my view this is completely wrong! Cost of goods sold (COGS) refers to the direct costs of producing the goods sold by a company. This amount includes the cost of the materials and labor directly used to create the good. By contrast, fixed costs such as managerial salaries, rent, and utilities are not included in COGS. Have a look at Investopedia - the term COGS is very well explained there!
P.P.S.: If there is a delta between units produced and units sold, this indicates that the inventory stock is increasing or decreasing!
(edited)
Was this answer helpful?
Hi there,
If you sell fewer units, COGS (the direct cost of producing goods or services) should also decrease. However it may not decrease proportionally.
COGS may also include costs like labour, which may be fixed. When the labor cost is fixed, then selling fewer units won’t decrease proportionally the COGS, as the labour cost won’t decrease.
Hope this helps,
Francesco
Was this answer helpful?
It is not mandatory.
COGS can be fixed costs, variable costs (as you are expecting), or a mix of both (most likely).
If you provide more context on the specific case - we can comment better
Was this answer helpful?
Not proportionally, COGS very often includes some fixed cost (e.g., labour, amortization of machinery) - this portion will not change depending on the number of units sold/produced
Was this answer helpful?
Hi there,
Sidi is correct...COGS will change based on units produced.
Was this answer helpful?
Related Cases
Expert case by Francesco
Our client is SmartBridge, a nonprofit educational institution offering face-to-face tutoring services. The client operates in the US.The mission of SmartBridge is to help as many students as possible to complete studies and prevent that they drop from the school system, in particular in disadv
...
Our client is SmartBridge, a nonprofit educational institution offering face-to-face tutoring services. The client operates in the US.The mission of SmartBridge is to help as many stude
...
(Open whole case)
31.7k
Times solved
Advanced
Difficulty
Expert case by Francesco
Style:
Our client is a BlissOttica, an Eyewear Manufacturer that is looking to reach a 10% increase in profits. How would you help our client?
Our client is a BlissOttica, an Eyewear Manufacturer that is looking to reach a 10% increase in profits. How would you help our client?
(Open whole case)
13.7k
Times solved
Intermediate
Difficulty
Expert case by Ian
Style:
Problem definition: Our client is Korean Car Parts (KCP), a multi-national original equipment manufacturer (OEM) of car parts based in Korea. They've recently seen a decline in profits and have brought us in to understand how to address this falling profitability.==========================
...
Problem definition: Our client is Korean Car Parts (KCP), a multi-national original equipment manufacturer (OEM) of car parts based in Korea. They've recently seen a decline in pro
...
(Open whole case)
11.4k
Times solved
Intermediate
Difficulty
Expert case by Casper
Style:
Our clients are two beer manufacturers from a well-developed country who just decided to merge. We can call them Company A and Company B. The decision about the merger has already been taken and our clients are certain it will soon be approved by regulators.What is expected from you is to help
...
Our clients are two beer manufacturers from a well-developed country who just decided to merge. We can call them Company A and Company B. The decision about the merger has already been taken
...
(Open whole case)
7.4k
Times solved
Advanced
Difficulty
Expert case by Agrim
Style:
Our client is a pharmacy in Dubai - called NewWave Pharmacy. This pharmacy wants to start a new & unique delivery service and want to understand if it is a good idea or not? If yes, then how should they price it? And how should they start it?
Our client is a pharmacy in Dubai - called NewWave Pharmacy. This pharmacy wants to start a new & unique delivery service and want to understand if it is a good idea or not? If yes, then how should they price it? And how should they start it?
(Open whole case)
900+
Times solved
Advanced
Difficulty
McKinsey Senior EM & BCG Consultant | Interviewer at McK & BCG for 7 years | Coached 350+ candidates secure MBB offers
429
Meetings
5,909
Q&A Upvotes
78
Awards
134 Reviews
I don’t understand. In the case direct labour cost is fixed, why are you saying COGS doesn’t include fixed costs?
Direct labour is not fixed. That’s why it is direct! E. g. wages paid on base of units produced. Imagine for example agriculture workers who are harvesting asparagus and are paid based on the total weight of asparagus harvested.
(edited)
Sorry but what you are saying doesn’t make sense. Direct labor cost simply means the cost is for a worker directly related to the production of a product/service. There is no reason to assume that cost should always be variable