Cost of Goods Sold

Cost of Goods Sold (COGS) is another variable expense directly related to your sales. By definition, COGS include all costs attributable to the production of the goods sold by a company. COGS composition depends on whether you are manufacturing or reselling goods.

Costs of goods manufactured by your business include material, direct labor, and allocated overhead. The costs of those goods not yet sold are deferred as costs of inventory until the inventory is sold or written down in value.

As most businesses manufacture more than one product, accurate calculation of COGS requires proper cost allocation. Which, in turn, requires a highly efficient corporate cost accounting system.

Cost of goods purchased for resale includes purchase price as well as all other costs of acquisitions, excluding any discounts. Additional COGS may include freight paid to acquire the goods, customs duties, and fees paid for acquisition. And again, you will have to implement a highly efficient corporate cost accounting system to make sure that you correctly capture and allocate all COGS.