Lesson 3 - Usage & COGS
Table of Contents
We touched on usage in Lesson 2 on pour cost. Here we drill into it in more detail and how it relates to cost-of-goods-sold (cogs).
Usage & COGS
Usage is the amount of stock used from one period to the next. It is expressed in quantitiy terms (number-of-individual-units used) and tells you what was used during a particular period.
Usage is made up of the following:
- Sales (the best kind)
- Known shrinkage: waste, training, staff drinks, comps*
- Unknown shrinkage: over pouring, spillage, theft
*Staff drinks & comps (free guest drinks) are often recorded as a zero-value sale under an entertainment code in the POS. Whether recorded as shrinkage or a zero-value sale, the net effect is to increase your pour cost.
There are two ways to calculate usage, one based on stocktakes (actual usage) and the other based on sales data (theoretical usage). Theoretical usage is, more often than not, less accurate than actual usage as it is derived from quantities sold. It is, however, easier to keep track of provided all sales items are mapped to their respective products. This can be a challenge in itself!
The difference between actual usage and theoretical usage is known as variance or “unknown shrinkage”. It is important to keep a handle on this and to understand the reasons for variance. In an ideal world, variance would be zero.
Actual usage = opening count + purchases (less returns) + transfers-in - transfers-out - closing count
Theoretical usage = sales + known shrinkage
Variance (or hidden shrinkage)
Variance = actual usage - theoretical usage
In most cases, variance is positive (actual > theoretical) and is due to either over pouring, spillage, and/or theft. If variance turns out to be negative, it is likely due to either incorrect counts or underpouring.
Advantage/disadvantage of actual & theoretical usage
|Actual usage||Theoretical usage|
|Advantage||Most accurate as based on actual stock-counts||Can be tracked in real-time (based on sales data)|
|Disadvantage||Takes time - must do opening & closing stocktakes||Sales items must be mapped to their respective products|
COGS is the value or cost-of-goods-sold during a particular period.
Before delving deeper, it is worth nothing that this includes not just the cost-of-goods-sold but also the cost-of-goods-wasted, used for training, spilled, etc. It is therefore, in effect, the cost-of-goods-used however, we will stick to convetion and refer to it as cost-of-goods-sold.
Calculating COGS is a little more difficult than summing [usage * lastest price]. First, prices are subject to change and you need to know how your Bar/Restaurant plans to value stock-on-hand e.g. FiFo, LiFo, WAC. Check with your Accountant if you are unsure. We will cover these valuation methods in a later lesson.
Pour Cost (recap)
As we saw in Lesson 2, COGS is used to calculate pour cost, an important metric that Bars & Restaurants keep track of and benchmark themselves against. Pour cost is cost-of-goods-sold expressed as a percentage of sales, for a particular period.
Pour cost % = (COGS/Sales)*100
Overtime, actual & theoretical usage will diverge from one another due to variance. It is thus recommended to calculate both and to reconcile differences often. How often depends on how big of a problem variance is and to what extent you want to micro-manage your beverage stock.
At a minimum, we recommend calculating actual usage once a month, at month-end. Indeed, it is probable that your accountant will require this.
To expedite the process, use a stocktake app such as Barsumo Stocktake App ✨