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Enhance your project management with COGS formula

Huwen Arnone
Sep 19, 2024 4:00:00 PM

If you work in any project management-related field, you know that focusing on project financial control is critical to delivering products or services efficiently. Here's when managing the project's Cost of Goods Sold (COGS) and overall budget is crucial to ensure profitability. In this blog, we'll explore how an efficient approach to project management can reduce costs and improve COGS.

COGS can be a critical metric in the project management realm (even when it's not directly associated) in the form of direct costs, when those projects managed are involved in producing a product or service. Effectively managing COGS helps project managers control expenses and maximize profitability, and choosing the right software tooling will push that financial tracking process, allowing teams to manage budgets, link costs to specific tasks or issues, and refresh real-time cost data.

Although COGS is not common in project management (terms like direct costs or execution costs are more common, as stated before), a similar methodology can be applied to calculate a project's direct costs. It's a way of understanding the cost of resources consumed during a project's life cycle.

Project managers can easily track COGS, optimize expenses, and ensure projects are delivered within budget, ultimately enhancing financial control and project success. Let's get in-depth about this crucial term:

What is COGS?

COGS, or Cost of Goods Sold, represents the direct costs incurred in producing or purchasing the goods a company sells during a specific period. This includes costs such as raw materials, direct labor, and manufacturing overhead directly tied to production.

COGS plays a significant role in determining a project's profitability. Project managers can make informed decisions about resource allocation, pricing, and project timelines by monitoring COGS.

The Cost of Goods Sold refers to the direct costs of producing goods a company sells. To calculate it, the COGS formula is:

COGS = Beginning inventory + Purchases - Ending inventory

In this formula:

  •    Beginning inventory: The value of the inventory at the start of the accounting period.
  •    Purchases: The total cost of additional inventory purchased during the period.
  •    Ending inventory: The inventory value left unsold at the end of the accounting period.

In practice, this could look like this, assuming the following values:

  • Beginning inventory: $30,000
  • Purchases: $50,000
  • Ending inventory: $20,000

COGS = $30,000 + $50,000 - $20,000 = $60,000

The Cost of Goods Sold by this company for an X timeframe would be $60,000

Is the Cost of Goods Sold important?

As COGS is primarily vital for businesses, tax authorities, and financial professionals, sometimes it's forgotten it can be relevant for project management in the shape of direct costs, given that financial health assessment, decision-making, and compliance play a significant role when managing projects, especially in sectors like software development or manufacturing. Tracking COGS gives businesses visibility into whether their costs are in line with their revenue goals or not.

Tracking and controlling COGS is a key strategy in preventing budget overruns. It enables the efficient allocation of resources, ensuring project profitability and, ultimately, the longevity of the work. COGS is good for project managers who monitor the direct costs associated with product or project development, such as materials, labor, and production expenses.

Before getting more in-depth with what COGS, let's threshing what COGS means to project management:

Why is COGS important to project managers?

Having these types of costs defined will help in different performance areas within project management, as it impacts budgeting, decision-making, performance tracking, and stakeholder communication. By effectively managing and analyzing COGS, it's possible to enhance project outcomes and organizational profitability. More specifically, it can help with the following:

  •    Budget management: Understanding COGS helps project managers monitor direct costs associated with the production of goods, allowing them to stay within budget and enabling better resource allocation to meet project goals.

  •    Profitability analysis: COGS allows to inform project managers about the financial feasibility of projects; it also helps in calculating gross margins to evaluate the profitability of specific projects or products.

  •    Decision making: COGS is instrumental in allowing to make informed choices regarding sourcing materials, production processes, and pricing strategies. It also helps identify cost-related risks and develop strategies to mitigate them.

  •    Cost tracking and performance: COGS should be tracked over time to assess whether projects meet their financial targets. Comparing it with industry standards allows performance and efficiency to be evaluated.

  •    Stakeholder communication: COGS's data provides stakeholders with insights into project financials. It also helps justify resource needs and project viability.

That's why controlling these direct costs should be very relevant to any person within the project management realm. This will enhance profitability and efficiency in operations. Regular assessment and adaptation of these strategies will help sustain improvements over time.

Besides, for service projects (consulting, software development, marketing, etc.), it's possible to adapt the COGS idea to calculate the Cost Of Services Sold (COSV) or direct costs, which are the cost of resources (labor, tools, materials) allocated to the delivery of the service or completion of a project.

At this point, the “Where” becomes the question: Where to track these costs?

What's the best way to manage COGS?

Nowadays, there is a wide range of software solutions for project management. However, Jira remains at the top-of-mind in that area regarding project tracking and task management. That's why you're more likely to use this software if you're a project manager.

Once there (in Jira), managing COGS effectively requires a system that can track the costs of resources, time spent, and materials referred to it directly (there's no native function for this). What better way than adding an app that provides such commodities in the same place where you manage your projects?

As mentioned, overlooking critical budget data can lead to increased project costs and, in turn, lower margins. As a project manager, being cautious and attentive about these is crucial to avoid such outcomes.

Enter Budget Management in Jira: A new dimension for projects

The best way to learn about this new dimension in Jira could be Budgety, a comprehensive app available in the Atlassian Marketplace that integrates seamlessly with Jira to manage project budgets, track costs and expenses in real-time, and associate those to the information you're already tracking in Jira.
Budgety allows financial control to be validated within the context of related projects. This enhances project management by keeping teams aligned on financial goals while maintaining the visibility of their spending. It offers an intuitive interface to manage COGS (as direct costs) within Jira.

Benefits of using Budgety to track costs for project management

By integrating Budgety with Jira, teams can enhance their project management in several ways:

  •    Increase financial visibility: The Jira app provides detailed insight project's cost, where resources are being spent, and whether the project meets financial targets.

  •    Improves decision-making: Jira's real-time tracking empowers project managers to make agile, data-driven decisions, adjusting resources and workflows on the fly to optimize costs.

  •    Allows to reduce COGS: Understanding COGS as direct costs will enable the inputting and tracking of this data for better labor and material cost control, allowing businesses to reduce overall COGS leading to higher profitability.

  •    Prevent budget overruns: Setting up a budget associated with any type of issue in Jira allows for immediate corrective actions before those overruns become a serious issue.

The smart software investment is based on CAPEX: A strategic balancing act

Efficient project management is more than tracking tasks and milestones —it's about ensuring that the work's done within budget constraints while optimizing costs like COGS. By integrating apps like Budgety into Jira, you can gain control over every aspect of your projects, such as budgets, reduce costs, and ultimately improve profitability.

Whether you're managing software development projects, manufacturing workflows, or service-based projects, Budgety is a versatile tool for proactively managing budgets and tracking costs. It will help you deliver better results and avoid financial pitfalls regardless of the project type.

By following this advice and taking advantage of Budgety features, you'll leap into optimizing business and project management financial outcomes.

Get the best out of COGS in Jira with Budgety

Get the best out of COGS in Jira

Budgety allows you to transform your Jira into a project management solution that balances budget efficiency and overall cost control, making sure every project is successfully completed on time.

Don’t waste more time, and start tracking the evolution of COGS intelligently and in alignment with your organization’s goals.

TRY BUDGETY NOW FOR FREE

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