However, many businesses do not separate out COGS at all. The Benefits of Using COGSīusiness that use COGS are able to achieve better visibility into their profit margins, allowing them to identify opportunities to increase profitability. Plant health care or grading) or lower margins (eg. While COGS should certainly be a focus for optimizing financial health, some business models naturally lend themselves to higher margins (eg. The lower COGS, the better, as it indicates a high profit margin on sales or services. For example, a business reselling widgets would count the cost of the widgets as a COGS, whereas a business manufacturing widgets would count raw materials, supplies and labor that go into the widget manufacturing process. COGS differ from overhead expenses in their direct connection to the production of revenue, while overhead expenses are related to the operation of the business as a whole.Īll expenditures essential to producing top line revenue are considered COGS. COGS are also referred to as the “Cost of Revenue” or “Cost of Sales.” In a nutshell, COGS tracks how much a business is spending to generate their top line sales. COGS Definition & OverviewĬost of Goods Sold (COGS) are expenditures in the course of business directly related to the production of revenue.
In this article, we’ll attempt to demystify it and explain how it works. The Account on the Income Statement called Cost of Goods Sold (COGS) can be confusing to non-accountants.
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