Overview
Cost of Goods Sold (COGS) represents the direct expenses associated with producing the goods that a company sells. It includes the costs of materials and labor directly used in creating a product, ensuring that you capture the true cost per unit of your offerings.
What Is Included in COGS?
COGS covers all direct costs related to the production or resale of a product. Examples include:
Materials:
Raw materials and components used to manufacture the product.Labor:
Direct labor costs that go into producing or assembling each unit.Other Direct Costs:
Products purchased for resale
Packaging directly related to the product
Any other costs that are 100% dedicated to creating or selling the product
What Is Excluded from COGS?
COGS does not include indirect expenses that are not solely tied to the production of a specific item. These overhead costs include:
Distribution Costs:
Shipping and handling expenses.Rent:
Costs for facility space that aren’t directly tied to production.Marketing Costs:
Advertising and promotional expenses.
Since these expenses serve broader business operations, they are not factored into COGS calculations.
Alternative Terminology
Cost of Sales:
For businesses that provide services or sell non-physical goods, COGS may also be referred to as “cost of sales.”
Key Takeaways
Direct Costs Focus:
COGS includes only the direct expenses involved in producing your product.Excludes Overhead:
Indirect costs like rent and marketing are not part of COGS.Essential for Pricing:
Understanding COGS is crucial for pricing your products and analyzing profit margins.
By accurately calculating your Cost of Goods Sold, you can better manage your production expenses and make informed pricing and financial decisions for your business.