What is Cost Of Goods Sold (Cogs)? Definition
What is cost of goods sold (COGS)? Cogs refers to the direct costs associated with producing a product or service. This includes the cost of materials, labor, and overhead. In accounting, COGS is considered an expense and is recorded on the income statement. The purpose of recording COGS is to show the company’s gross profit. Gross profit is the difference between net sales and COGS. COGS is important because it shows how much it costs to produce a product or service. This information can be used to price products, negotiate contracts, and make strategic decisions about where to allocate resources.
What is Cost of Goods Sold (COGS)?
The cost of goods sold, also known as “cost of sales,” is the direct costs attributable to the production of the goods sold in a company. This amount includes the cost of the materials used in creating the good, the direct labor costs used to produce the good and any other direct costs related to producing the good. The cost of goods sold is often referred to as the “cost of sales.”
How to Calculate COGS
COGS includes the cost of materials and direct labor associated with producing the product. For example, if you manufacture chairs, COGS would include the cost of the wood and fabric used to make the chair, as well as the wages paid to the workers who assemble it.
To calculate COGS, start by identifying the direct costs associated with making your product. This might include materials, labor, and overhead costs like rent and utilities. Once you’ve identified all of the direct costs, add them up to get your total COGS.
For example, let’s say you own a furniture company that makes tables and chairs. Your direct costs might include:
Wood for the table: $100
Fabric for the chairs: $50
Wages for the workers who assemble the furniture: $200
Overhead costs like rent and utilities: $50
In this example, your total COGS would be $400.
What is the Difference Between COGS and Operating Expenses?
Operating expenses are the costs incurred in running a business. They include administrative, marketing, and other general expenses. COGS, on the other hand, is a term specifically used to describe the direct costs associated with producing a product or providing a service. This includes materials, labor, and other direct expenses.
How Does COGS Affect a Company’s Income?
As a business owner, it’s important to have a clear understanding of how your company’s income is affected by the cost of goods sold (COGS).
Your COGS includes the direct costs associated with producing your products or services. This would include the cost of materials, labor, and any other direct expenses. These costs are then deducted from your gross revenue to arrive at your company’s net income.
While it’s important to keep an eye on your COGS, it’s also important to remember that it’s just one factor that affects your company’s overall profitability. Other factors such as overhead costs, marketing expenses, and general operating expenses all play a role in determining your bottom line.
Conclusion
If you are in business, it is important to understand your cost of goods sold (COGS). This is the direct costs associated with producing your product or service. COGS includes materials and labor. It excludes indirect expenses, such as overhead and marketing. To calculate your COGS, you will need detailed records of your material and labor costs. Keep track of these costs on a regular basis so that you can make informed pricing decisions for your products and services.