Cost of Goods Sold
Cost of Goods Sold is one of the most notorious sections in a company’s financial statements…
and so often I see founders and even Finance & Accounting professionals gets confused.
Today, we’re going to debunk that myth and break it down in real simple terms.
What is the Cost of Goods Sold?
Cost of Goods Sold (COGS) is exactly what it sounds like…
the cost to produce and deliver what you are selling to customers
They key thing to ask yourself is - if this cost didn’t exist, would I still be able to deliver my product or service to my customer?
If the answer is no, then you most likely have a cost of goods sold on your hands
Where does Cost of Goods Sold show up?
Cost of Goods Sold is an item that shows up on your profit & loss…since it directly ties to amounts you are earning vs consuming.
This section appears right under Revenue
Although COGS is as profit and loss item....
it’s common for amounts to originate on the balance sheet.
For example... via inventory, before it gets sold and eventually expensed on the P&L.
This is the case under both cash and accrual accounting.
When you subtract out your COGS from your Revenue, you get a very important metric…
your Gross Profit.
Let’s now go over some examples of Cost of Goods Sold…
a quick note before we do that for some companies, these items below may be an operating expense, while for others, it may be a Cost of Goods Sold
It all depend on the nature of what you are selling.
1. Direct materials cost → The cost of raw materials that are directly used in the production process.
2. Direct labor cost → The cost of wages and benefits paid to employees who directly work on the production process.
3. Factory overhead cost → Indirect costs associated with the production process, such as rent, maintenance, and electricity.
4. Freight-in cost → The cost of shipping raw materials to the production facility.
5. Depreciation of production equipment → The amount of depreciation expenses related to production equipment over a certain period of time.
6. Obsolescence expense → The cost for damaged & defective goods that can no longer be sold to the general public
7. Web hosting → The cost of renting server space from a web hosting provider to store website files and make them accessible over the internet.
8. Server costs → The expenses associated with purchasing or renting physical servers and maintaining them to support website operations and data storage.
9. Domains → The cost of purchasing and renewing domain names, which serve as the website's address on the internet.
10. Customer support → The cost of providing support services to customers, including answering questions, addressing concerns, and offering technical assistance.
11. Merchant processing fees → The fees charged by payment processors for processing online payments, such as credit card fees or transaction fees (this has been debated, and some put in operating expense instead).