COGS

What is COGS?

COGS stands for cost of goods sold. It occurs under the Revenue and is the first expense-related item on the income statement. An intuitive way of viewing COGS is that the more revenue a company is generating, the more costs should be required. This is because of the raw material, transportation, and other costs behind the production process of goods. These costs that are directly related to revenue are called COGS. This also explains why COGS is sometimes also referred to as the direct cost.

The unsold products are also called inventory. Since COGS are directly related to the costs of inventory, COGS can be calculated as follows:

COSG = Inventory(t) + Purchase - Inventory(t+1)

Where:

Inventory(t): Inventory at the beginning of a period

Purchase: Money used to purchase materials & other costs during the production process throughout a period of time

Inventory(t+1): Inventory by the end of the period

So, when you are categorizing expenses, just ask yourself, "Will this cost increase if we increase the number of production and the revenue?" If the answer is yes, then it is grouped under COGS. If not, it should be grouped under other costs. Another category could be indirect cost, which is also called SG&A.