Definition:

Cost of Goods Sold, (COGS), have the right to additionally be referred to as cost of sales (COS), cost of revenue, or product expense, depending on if it is a product or business. It has all the prices straight involved in producing a product or moving a organization. These costs deserve to include labor, material, and also shipping. The concept behind COGS is to measure all costs (which are variable) directly connected with making the product or delivering the business.

You are watching: The costs of providing goods and services to customers are referred to as:

Sign up for our digital financial statement training and also gain the earnings statement training you need.

Example:

Let’s assume you begin a distribution agency and line up a couple of customers. In the first complete month of operation you perform $10,000 worth of business (this becomes our revenue line). For that month we additionally had actually expenses, consisting of the expense of gas for the shipment truck in the amount of $2,000, and also the salary of the driver at $3,000. These expenses are straight pertained to our service and fall into the Cost of Goods Sold (COGS) line. Tbelow are more line items that would be contained in COGS, yet you get the principle. All various other prices not directly concerned the product or organization goes under a category called Operating Expenses such as your receptionists’ or accountants’ salary. The height component of our revenue statement (through our COGS line) would certainly look like this:

*

Publication Excerpt:

(Excerpts from Financial Intelligence, Chapter 8 – Costs and also Expenses)

If you suspect that ascendancy is open up to a ton of interpretation, you’re on the money. The audit department has to make decisions around what to include in COGS or COS and what to put elsewhere.

Several of these decisions are easy. In a production company, for circumstances, the adhering to costs are absolutely in:

The wperiods of the human being on the manufacturing lineThe cost of the materials that are offered to make the product

And plenty of expenses are definitely out, such as:

The cost of offers used by the accountancy department (paper, etc.)The salary of the human resources manager in the corporate office

Ah, yet then there’s the gray area—and also it’s substantial. For example:

What about the salary of the perkid who manperiods the plant wright here the product is manufactured?What around the wperiods of the plant supervisor?What about sales commissions?

Are every one of these directly related to the production of the product? Or are they operating costs, prefer the price of the HR manager? There’s the same ambiguity in the organization environment.

See more: Does By Date Include That Day, What Does It Mean To Pay By A Certain Date

COS in a service company commonly includes labor connected with transporting the company. But what about…