Cost of Goods Sold (COGS) heads in the Chart of Accounts (COA)

Find out interesting insights with Shaun Walker, SOC Compliance Manager, North Poke Southern

Moderated by Emily, Digital transformation Consultant at Hyperbots

Don’t want to watch a video? Read the interview transcript below.

Emily: Hi, everyone. This is Emily, and I am a digital transformation consultant with Hyperbots. Really pleased to have Shaun on the call with us, he is with North Poke Southern, and he is the SOC Compliance Manager. Thank you so much for joining us today, Shaun.

Shaun Walker: Thanks so much for having me. Excited to be here.

Emily: So, Shaun, the topic we’d be discussing today is the cost of goods sold heads in the chart of accounts. To begin with, the first question I wanted to ask you is, why is it essential to have a well-structured COGS in the chart of accounts, and what impact does it have on financial reporting and decision-making?

Shaun Walker: Absolutely, I’d say it’s vital because it directly affects the accuracy of gross margin calculations, which are crucial for understanding a company’s profitability. A clear cost of goods sold structure also enhances transparency and consistency in financial reporting, which is crucial for internal analysis, compliance, and most importantly, investor confidence.

Emily: Got it. So, Shaun, how should COGS or cost of goods sold be structured differently across different industries, such as manufacturing, retail, SaaS, construction, and healthcare? Could you provide some examples?

Shaun Walker: Yeah. The main point is that it needs to reflect the specific cost drivers. For example, in manufacturing, the cost of goods sold includes raw materials, direct labor, and manufacturing overhead, while retail focuses on inventory purchases, inbound freight, and shrinkage costs. Construction would cover more direct material costs, labor, subcontractor costs, and equipment rental. Healthcare would relate more to medical supplies, direct labor, and depreciation of equipment. Each industry has unique elements that need to be captured to have the most accurate insights.

Emily: Got it. Thank you so much for sharing that information, Shaun. Moving toward best practices, what are some of the best practices for structuring the cost of goods sold in the chart of accounts to ensure they are truly meaningful and actionable?

Shaun Walker: The main thing is to align with the specific operations of the business. We want to maintain a level of granularity that provides actionable insights and ensures consistency across periods for accurate trend analysis.

Emily: Understood. Any common mistakes you’ve seen companies make when structuring the cost of goods sold in their chart of accounts? And how can these be avoided?

Shaun Walker: Sure. Common mistakes include overgeneralizing the cost of goods sold categories, which obscures key cost details, hinders analysis, and misclassified expenses, such as including indirect costs under the cost of goods sold. Another error is failing to update the cost of goods sold in response to changes in business operations, like a new product or service. To avoid these mistakes, companies should regularly review their cost of goods sold structure, ensure clear guidelines for categorization, and involve cross-functional teams in designing the chart of accounts.

Emily: Understood. Also, Shaun, how can AI help in managing the cost of goods sold structure more effectively within the chart of accounts? Can you share some specific examples?

Shaun Walker: AI can automate the categorization of expenses and analyze transaction patterns, which reduces manual errors and ensures consistency. For example, AI can use natural language processing to interpret invoice details and automatically assign costs to the appropriate subcategories, improving both granularity and accuracy.

Emily: Got it. Also, can you elaborate on how AI-driven predictive cost management works and its benefits for businesses?

Shaun Walker: Predictive cost management uses historical data, market trends, and real-time operational information to provide a forecast for the future. It helps businesses anticipate potential cost overruns or savings opportunities and enables proactive management decisions, such as adjusting production schedules, renegotiating supplier contracts, or optimizing resource allocation.

Emily: Got it. Just out of curiosity, Shaun, what role does AI play in enhancing the granularity of the cost of goods sold data, and why is this granularity important?

Shaun Walker: AI enhances granularity by breaking down the cost of goods sold into specific subcategories and cost elements. This granularity is important because it helps identify inefficiencies, informs pricing strategies, and supports more accurate financial forecasting and analysis.

Emily: Understood. To summarize the conversation, Shaun, one last question: looking ahead, how do you see the role of AI evolving in the context of managing the cost of goods sold and overall financial management?

Shaun Walker: I see it expanding and growing significantly. As AI systems become more sophisticated, they’ll provide even more accurate and real-time insights and analysis. It can automate complex processes, support predictive analytics, and help businesses stay ahead of potential issues. Ultimately, AI will not only improve the efficiency of financial operations but also enable more agile and informed decision-making.

Emily: Got it. Thank you so much for sharing these valuable insights, Shaun. It’s clear that having a well-structured cost of goods sold in the chart of accounts is crucial, and AI is proving to be a powerful tool in optimizing this area. Thank you so much.

Shaun Walker: Absolutely.