We’ll start with ‘manufacturing’ since it’s easiest to understand and most likely where COGS originated.Ī manufacturing company calculates COGS by adding all of the costs that helped create the product (i.e. Many industries have their own accepted way of tracking COGS - below are a few examples. in many industries, rent, marketing, advertising and other overhead costs are not included in COGS since they are not directly attributable to the product or service).ĬOGS sits on a company’s income statement/profit and loss statement and has a direct effect on net income and a company’s business taxes.
Most industries have their own methods of calculating COGS (we’ll speak about that below) but the fundamental idea is that there are no other expenses included in the computation of COGS other than the cost of the product itself (i.e. In summary, COGS costs are ones that are directly related to delivering a product or service to customers.
#COGS INCOME STATEMENT DRIVERS#
The drivers of gross profit are revenue and cost of goods sold (COGS) or cost of sales (COS).īefore we get into how gross profit is calculated, let’s dive a little deeper to understand COGS.ĬOGS refers to the inputs (in dollars) that are used to create, purchase or service a product that is sold to earn revenue.
It’s a metric that is scrutinized heavily by business owners and outside stakeholders. A key metric in evaluating the efficiency of a company’s products or services is gross profit (or gross margin percentage - a function of gross profit).
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