Corporate Finance & Accounting

Cost of Goods Sold (COGS)

What is Cost of Goods Sold (COGS)?

Cost of Goods Sold (COGS) refers to the direct cost of goods sold by a production company. This amount includes the cost of materials and labor directly used to manufacture the goods. It does not include overheads such as distribution costs and sales force costs.

Cost of goods sold is also known as “cost of goods sold”.

key takeaways

  • Cost of Goods Sold (COGS) includes all costs and expenses directly related to the production of goods.
  • COGS excludes overhead costs such as overhead and sales and marketing.
  • COGS is deducted from revenue (sales) to calculate gross profit and gross margin. Higher COGS results in lower profit margins.
  • The value of COGS will vary depending on the accounting standard used in the calculation.

Check Cost of Goods Sold (COGS)

Understanding Cost of Goods Sold (COGS)

COGS is an important metric in financial statements because it is subtracted from a company’s revenue to determine its gross profit. Gross profit is a measure of how efficiently a company manages labor and supply in the production process.

Because cost of goods sold is a cost of doing business, it is recorded as a business expense on the income statement. Knowing the cost of goods sold helps analysts, investors and managers estimate a company’s bottom line. If COGS increases, net income will decrease. While the move is beneficial for income tax purposes, the business will generate less profit for its shareholders. Therefore, companies try to keep their COGS low in order to improve their net profit.

Cost of Goods Sold (COGS) is the acquisition or manufacturing cost of a product sold by a business over a period of time, so the only costs included in this measure are those directly related to the production of the product, including labor, materials, and manufacturing overhead. For example, an automaker’s COGS would include the cost of materials for the parts that make the car and the cost of labor used to assemble the car. The cost of getting the car to the dealership and the labor cost to sell the car will be excluded.

In addition, the cost of vehicles not sold during the year, whether direct or indirect, will not be included when calculating COGS. In other words, cost of goods sold includes the direct cost of goods or services purchased by customers during the year.

COGS applies only to costs directly related to the production of goods for sale.

COGS formulas and calculations

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