What Is Included in the Cost of Goods Sold
The Cost of Goods Sold (COGS) includes everything from the purchase price of raw materials to the costs of turning them into a product and packaging it, as well as the shipping fees paid to deliver it to store shelves. It also includes the cost of paying the workers who manufacture the product. In some circles, COGS is also known as revenue cost or sales cost.
Calculating Cost of Goods Sold and Its Impact on Profits
COGS is an important number for investors to consider because it has a direct impact on profits. COGS is deducted from revenue to determine the gross profit of the company. Gross profit, in turn, is a measure of how efficiently a company is managing its operations. Thus, if COGS is too high, profits are negatively affected, and investors become concerned about the company’s overall performance.
Comparing Cost of Goods Sold to Sales Ratios
Before investing in a business, research the industry the business operates in and find out what is considered a natural or good COGS ratio in relation to sales. For oil drilling companies, one of the most important numbers to consider is the cost per barrel to extract crude oil from the ground, refine it, and sell it. This is, in fact, the COGS for the company.
If one company is able to obtain crude oil at significantly lower costs than its competitors, it has a distinct advantage and will funnel more profits to owners or shareholders, particularly during periods of collapsing oil prices. This is one reason why major oil companies like ExxonMobil are able to acquire the assets of struggling or bankrupt competitors during times of energy surplus.
You may also want to know how exposed the company is to the cost of a particular input. For a southern airline, fuel costs – and thus oil and refining – are the most significant costs the company faces. For Starbucks, coffee beans are the most important cost. For Coca-Cola, the price of sugar and corn is critically important.
Frequently Asked Questions (FAQs)
Where does Cost of Goods Sold go on the income statement?
COGS typically appears on the second line under total revenue. Gross profit is usually listed below, which is calculated by deducting COGS from the revenue amount. These three figures will give business owners and investors a good idea of the company’s performance.
What is not included in Cost of Goods Sold?
“Cost of Goods Sold” refers to the direct price incurred in the production of the product itself. However, companies have other costs, and these indirect operating costs are not included in COGS. Other costs might include distribution costs, rent, utilities, insurance, and other expenses considered general selling and administrative costs.
Source: https://www.thebalancemoney.com/cost-of-goods-sold-cogs-on-the-income-statement-357569
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