Why is COGS often expressed as a percentage of sales?

Cost of Goods Sold (COGS) is often expressed as a percentage of sales primarily to gauge inventory management effectiveness. This metric allows businesses to analyze how efficiently they are managing their inventory in relation to sales volume. By calculating COGS as a percentage of sales, management can better understand the costs associated with producing or purchasing the goods that are sold during a specific period.

Understanding this percentage helps identify trends over time. For instance, a consistent increase in COGS as a percentage of sales may indicate rising production costs or inefficiencies in inventory management. Conversely, if this percentage decreases, it may suggest improved operational efficiencies or cost control, leading to higher profitability.

Using COGS as a percentage of sales serves as a valuable tool for strategic decision-making, influencing everything from pricing strategies to supplier negotiations. By focusing on inventory management through this lens, businesses can enhance their overall operational effectiveness and financial performance.