If your company sells finished goods purchased from manufacturers, those purchasing costs are also included in your COGS.
COST OF REVENUE VS COGS HOW TO
How to Calculate COGS for Physical GoodsĬOGS are the costs that your business incurs to create and deliver your product or service.It’s important to keep in mind that COGS only includes costs directly involved with creating or purchasing your product and getting it to your customers – overhead costs like marketing are considered operating expenses instead (more on that later). We’re here to clear it up.ĬOGS are the costs that your business incurs to create and deliver your product or service. And like many aspects of bookkeeping and finance, it can be confusing if you don’t have a background in the field. It’s one of the first sections on your income statement, and it can affect how you report your business taxes. Rather, these are intended as general logic behind strict accounting definitions that may help to memorize the difference between the two.Cost of Goods Sold (COGS) is one of the most fundamental concepts in your business’s finances. E.g., there are situations when production stops, but the company reports some minimum cost of revenue to support production site. The definitions for Costs of Sales and SG&A are not intended as accounting guidance. Knowing Costs of sales and SG&A (as pct of revenue) helps compare companies at operational level within industry and across industries. When you assess prospects of buying a company you need to understand if the company generates enough cash (think of EBITDA here and EV/EBITDA which is a shortcut for company value), generates it effectively, and if the operations could be improved. Let alone that similar items in two similar companies may be under different names. inventory accounting rules (FIFO or LIFO).Adjustment may include bringing both companies to the same: The job of the Financial analyst in this case is to make two sets of the Financial Statements as comparable as possible before drawing any conclusion that one company is more management-wise efficient than the other. Comparing Cost of Sales and SG&A between two companies, even within the same industry may be tricky, as you said.Or you may use historical records of both to identify why your net income margins have shrunk during the last quarter (this would be called horizontal analysis). You may use Cost of Sales vs SG&A within one company for break-even analysis, to calculate how much production you need to sell to cover overhead (or vice versa how many admin people to lay off to match current state of the economy).One more subtle accounting difference, Cost of Sales is accounted for on accrual basis (matched to sales) while SG&A is charged to Income statement in the period it's incurred. The main difference between the two ( roughly) is that Costs differ with production level ( almost) while SG&A is considered to be fixed. SG&A is overhead incurred while helping production. Cost of sales are your expenses directly incurred in the production cycle or service delivery. Then what if we'd compare say automotive to IT. Without really understanding what's in there, the numbers seems incomparable. For example, Oracle has only 20% of their cost presented as "cost of revenue" while IBM has about 50%.
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Then as we start comparing companies and industries, it seems not everybody is using the same standards. So if anything, the name "cost of revenue" seems to be misleading.
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I mean, to generate revenue from water and barley I needed:īut from what I understand, the cost of sales (and marketing etc) of my product is only included in operating expenses (under SG&A) and my financial expenses in continous operations. How do cost of revenue and SG&A compare (across industries)?įor cost of revenue, one definition is "the cost of manufacturing and delivering a product or service".Īssuming my product is beer, my cost of revenue would be cost of water, barley, wheat etc, correct?īut that's very incomplete.