What Is Cost Of Goods Sold & Why You Need To Look At It

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The cost of goods sold (COGS) refers to the labor and supplies used to manufacture your product or service. It does not include other expenses incurred to run your business (e.g., advertising, trade memberships, business meals, sponsorships).

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COGS Accounting

Your business has direct and indirect costs — the direct costs are for building your product/service, while the indirect costs are for operating your business. Then, COGS takes it a step further.

Cost of Goods Sold Examples

Direct: Do you incur the cost only when you have an order to fill? Then, these are probably direct expenses. Examples include consumption of inventory items, buying supplies for the order fulfillment or the costs associated with using specialized equipment.

Indirect: Would your business incur the cost even if it did not have a single order to fill? Then, these are likely indirect expenses. Examples include paying your bookkeeper, taking a vendor to lunch or attending a trade association meeting.

TIP: COGS includes some indirect costs, so it's best to talk with your accountant first. 

Looking for a free chart of accounts? Download ours here which you can upload to QBO.

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DISCLAIMER: Please consult with your accountant, attorney and financial advisor before implementing any tips displayed on this website. DIY research does not replace the advice of a licensed professional who has thoroughly reviewed your file.