Why Most Plants Can’t Calculate True COGS by Product

Most plants can produce a COGS number for each product. It appears in ERP reports, finance decks, and margin analyses. It looks precise enough to support pricing, mix, and investment decisions.

And yet, when leaders ask basic questions like:

• Which products actually make money?

• Which SKUs destroy margin under real conditions?

• Which mix should we run when capacity tightens?

Confidence disappears. The problem is not accounting rigor.
It is true that COGS depends on operational behavior and not static assumptions.

What “True COGS” Really Means in Manufacturing

True COGS is not just material plus labor plus overhead. It reflects how a product behaves as it moves through the plant.

True COGS includes:

• How much variability the product introduces

• How often it triggers changeovers

• How sensitive it is to quality drift

• How much rework it causes

• How it consumes engineering and maintenance attention

• How it displaces other work during disruptions

Most systems capture cost categories. They do not capture cost behavior.

Why ERP-Based COGS Breaks Down

ERP COGS calculations rely on assumptions that rarely hold in execution.

They Use Averages Instead of Distributions

ERP assigns:

• Average cycle times

• Average yields

• Average setup durations

In reality, cost is driven by variability. Two products with the same average cost can have wildly different tail behavior, and the tail is where margin is lost.

They Allocate Overhead Evenly

Overhead is typically allocated by:

• Labor hours

• Machine hours

• Units produced

But overhead is consumed unevenly.

Products that cause instability consume more:

• Planning effort

• Supervision time

• Quality attention

• Maintenance response

Equal allocation hides which products actually drive indirect cost.

They Ignore Changeover and Sequencing Effects

Changeovers are often:

• Simplified

• Averaged

• Or excluded entirely from product-level COGS

In high-mix plants, changeover behavior can dominate cost. A product that looks cheap in isolation may be expensive because of the sequencing it forces.

They Miss the Cost of Human Compensation

When a product is fragile, teams compensate:

• Slowing runs

• Adding checks

• Resequencing work

• Applying manual oversight

These actions stabilize output but increase labor and management cost. Because they are informal, they never appear in product COGS.

They Treat Scrap and Rework as Global Loss

Scrap is often tracked at:

• Line level

• Shift level

• Plant level

It is rarely attributed accurately to the products that create the risk conditions. Products that trigger scrap indirectly escape accountability.

They Exclude Decision Latency and Coordination Cost

Some products require:

• More approvals

• More engineering involvement

• More quality sign-off

• More schedule negotiation

The time spent deciding is real cost. It is never assigned to the products that cause it.

The Result: COGS That Looks Right but Acts Wrong

When COGS is incomplete:

• Pricing decisions backfire

• “High-margin” products consume disproportionate effort

• Low-volume SKUs quietly destroy throughput

• Mix optimization fails during constraint

• Improvement efforts target the wrong products

Finance sees margin. Operations sees pain. Neither can reconcile the difference.

Why Finance and Operations Talk Past Each Other

Finance trusts the numbers. Operations trusts experience.

Finance asks:

• Why are margins eroding if COGS is stable?

Operations responds:

• This product is killing us on the floor.

Both are correct within their own frames. The missing link is behavioral cost visibility.

What It Actually Takes to Calculate True COGS

1. Track Cost by Behavior, Not Just Category

True COGS requires visibility into:

• Variability introduced per product

• Changeover impact by sequence

• Rework loops and quality sensitivity

• Downtime correlation

• Supervision and escalation frequency

This data exists, but it is scattered and rarely unified.

2. Attribute Indirect Effort to the Products That Cause It

Instead of spreading overhead evenly, plants need to understand:

• Which products drive instability

• Which consume disproportionate attention

• Which force schedule disruption

Indirect cost follows behavior, not volume.

3. Include the Cost of Protecting Output

If a product requires:

• Extra checks

• Slower speeds

• Additional monitoring

Those actions are part of its true cost, even if they prevent visible losses.

4. Account for Mix-Dependent Cost

Product cost changes based on:

• What runs before and after it

• Which shift runs it

• Which equipment condition exists

• Which demand window it hits

True COGS is conditional, not static.

5. Align Financial Cost With Operational Reality

COGS must reflect:

• What actually happened

• Under what conditions

• With what effort

Without that alignment, margin analysis remains theoretical.

Why This Is Getting Worse

Several trends amplify the gap between reported and true COGS:

• Higher product mix

• Shorter runs

• Tighter delivery windows

• More customization

• Leaner staffing

• Aging equipment

As variability increases, average-based costing becomes less reliable.

The Role of an Operational Interpretation Layer

An operational interpretation layer makes true COGS visible by:

• Unifying execution, quality, maintenance, and planning data

• Linking cost drivers to real behavior

• Capturing human compensation as signal

• Correlating products with variability and disruption

• Explaining why certain SKUs consume more effort

• Maintaining conditional cost profiles instead of static numbers

COGS becomes explainable, not just reportable.

What Changes When True COGS Is Visible

Smarter pricing

Because prices reflect real effort, not averages.

Better mix decisions

Because leaders know which products to prioritize under constraint.

Targeted improvement

Because cost reduction focuses on the true drivers.

Fewer surprises

Because “profitable” products stop creating hidden losses.

Alignment between finance and operations

Because both see the same reality.

How Harmony Helps Reveal True Product COGS

Harmony helps plants understand true COGS by:

• Connecting product flow to execution behavior

• Interpreting variability, changeovers, and human intervention

• Linking indirect effort to specific SKUs

• Explaining cost differences by condition and mix

• Making operational cost drivers visible and auditable

Harmony does not replace ERP costing.
It completes it.

Key Takeaways

• Most plants calculate reported COGS, not true COGS.

• Average-based costing hides variability-driven loss.

• Indirect effort follows product behavior, not volume.

• Changeovers, rework, and judgment are real costs.

• Finance and operations diverge when behavior is invisible.

• Operational interpretation turns COGS into a decision tool.

If your “high-margin” products feel expensive to run, the issue isn’t discipline; it’s incomplete cost visibility.

Harmony helps manufacturers see true product COGS by connecting financial outcomes to real operational behavior.

Visit TryHarmony.ai