This measure determines the value of inventory shrinkage (i.e. costs associated with breakage, pilferage, and deterioration of inventories) as a percentage value of cost of goods sold (COGS). COGS represents the cost of purchasing raw materials and manufacturing finished products. This measure is part of a set of Process Efficiency measures that help companies optimize the performance of their "manage logistics and warehousing" process by minimizing waste and refining resource consumption.
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The business entity's inventory shrinkage as a percentage of cost of goods sold
Cost of Goods Sold (COGS)
Cost of goods sold (COGS) is the amount on an income statement that represents the cost of purchasing raw materials and manufacturing finished products. This represents specific or direct manufacturing cost of material and labor entering in the production of finished goods. For merchandise companies, cost of goods sold represents the purchase price of items sold, as well as indirect overhead such as freight, inspecting, and warehouse costs. For service organizations, cost of goods sold may be referred to as Cost of Services.
Process efficiency represents how well a process converts its inputs into outputs. A process that converts 100% of the inputs into outputs without waste is more efficient than one that converts a similar amount of inputs into fewer outputs.