Cost of goods sold (COGS, also referred to as “Cost of sales”) is a financial metric that represents the direct costs of producing and selling a product or service.
These costs are directly related to the production and sale of goods or services. Therefore, COGS exclude indirect costs like overhead and marketing expenses.
Examples of COGS
COGS can vary depending on the nature of the business. For a manufacturing company, COGS would include the cost of raw materials, labor, and overhead costs directly related to the production of goods. For a retail store instead, COGS would include the cost of inventory, shipping costs, and any direct labor costs associated with selling products.
Here are a few examples of COGS:
- A bakery that produces and sells bread would include the cost of flour, yeast, salt, and other ingredients as COGS.
- A car manufacturer would include the cost of raw materials, such as steel and rubber, as well as labor costs and the cost of manufacturing equipment as COGS.
- A clothing store that sells t-shirts would include the cost of the t-shirts, shipping costs, and any direct labor costs associated with selling the t-shirts as COGS.
COGS vs. Operating Costs
While COGS is directly related to the production and sale of goods, operating costs are expenses that are necessary for running a business, but are not directly related to the production of goods.
These costs include expenses like rent, utilities, marketing, and salaries. Unlike COGS, operating costs are not directly tied to the production or sale of goods, but they are necessary for running a business.
Here’s an example to illustrate the difference:
Let’s say a bakery sells bread for $5 per loaf, and the cost of producing each loaf of bread is $2. This means that the bakery’s COGS is $2 per loaf. However, the bakery also has operating expenses like rent, utilities, and salaries, which add up to $1 per loaf. So, the bakery’s total cost per loaf is $3 ($2 COGS + $1 operating costs).