Welcome to professrsavings.com, we teach finance basics.
Today we will teach you what is cost of goods sold in about two minutes.
This can be found in income statement so check out our video How to read an income statement?
Cost of goods sold, COGs, is the direct cost a company pays to produce its product or service.
Every company incur cost in the creation of their product. Labor, materials, and operating cost such as building rental and utilities are expenses that contribute to the COGS and essentially the final price of a product.
Let’s jump to an example.
Professor Savings buys a tie at a local retailer. The cost of the tie is $20.
Part of the price consist of the COGS which includes the cost of the items used to make that tie such as fabric, thread, sewing machine to create the tie, as well as electricity to run the sewing machine as well as the labor.
Only the costs associated with the actual creation of the product are included in the COGS.
Transportation, advertising or sales are not part of that figure. The cost of goods sold, COGS, is considered an expense for companies and it can be deducted from the revenue to calculate a company’s gross margin.