![]() Examples include overhead costs, labor, storage, and utilities. SummaryĬOGS represents the costs required to produce the goods a company sells. It’s normally shown directly under revenue.Īs it is not an asset or a liability, it’s on the income statement and not the balance sheet. Where can you find COGS?ĬOGS is located near the top of the income statement. On a high level, it does not include overhead costs like management, distribution, marketing, and sales.ĬOGS also does not include any inventory that has been manufactured or acquired but not yet sold, since these items have not contributed to revenue. Understanding what COGS doesn’t include is harder. This is because COGS is a cost of doing business, so can be deducted as a business expense from the revenue it generates.įor this reason, inventory accounting methods are a critical component of COGS. Importantly, COGS only includes the costs of goods that have actually been sold, meaning they’ve generated revenue during a specific time period. So, for a factory producing sausage rolls, factory overheads would be included, whereas office rent for administrative staff would not. If you’re unsure which costs to include in COGS, keep in mind that the basic idea is to consider whether the cost would exist if the product hadn’t been produced. However, this number doesn’t consider how longer-term, multi-year expenses - like investing in new machinery, capital structure, or tax - are affecting profitability.Īdditionally, service companies tend to use the cost of sales or the cost of revenue instead of COGS, as they don’t sell actual goods. The profitability of the company’s core operations, or gross profit, can be found by subtracting the COGS from revenue. ![]() ![]() Items like rent are normally included instead in operating expenses since the building is rented regardless of whether the goods are produced and sold. Notably, it does not include the following: Costs and transportation of raw materials.The Cost of Goods Sold, or COGS, is the sum of the direct - mainly variable, but also some fixed - costs incurred to produce or acquire the goods that a company sells.įor example, COGS includes the following: ![]()
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