Cost of Goods Sold (COGS)
Candlefocus EditorCOGS includes all costs and expenses associated with the production of goods, including direct materials and labor, packaging, delivery and processing fees, storage, inventory costs, etc. It does not include indirect costs, such as overhead and sales & marketing, or operating expenses (OPEX) that are not directly related to the production of goods or services.
The value of the COGS will vary depending on the accounting standards used in determining it. Generally accepted accounting principles (GAAP) outline what counts as a COGS expense and what does not. For example, an advertising cost for a certain product would not be part of COGS, but advertising costs for all products may be allocated to each item as a factor in determining its cost of goods sold. It is important to note that COGS does not include any margined costs, such as mark-up used to determine sales price.
When calculating COGS, it is beneficial to consider the different factors to determine what costs are direct and which are allocated so that you can accurately determine gross profit and gross margin for the period. A higher COGS results in lower margins, thus meaning that a business must price its products higher or look for other ways to control costs in order to remain profitable.
In conclusion, COGS is an important concept in accounting as it provides a measure of profitability, can lead to better pricing decisions, and helps control costs. The value of COGS will vary depending on the accounting standards used in the calculation and thus careful consideration must be taken when computing it.