Cost of goods sold (COGS) is the direct cost associated with producing goods or services that a company sells. It includes the cost of materials, direct labour, and any direct factory overhead costs used in making these goods or services.

Key takeaways

• Represents the direct costs of producing goods or providing services
• Crucial for calculating gross profit and profit margins
• Includes raw materials, direct labour, and manufacturing overhead
• Excludes indirect expenses like marketing and distribution costs
• Impacts pricing decisions and overall profitability

Cost of goods sold is a fundamental concept in accounting and business operations. It directly affects a company's profitability and is used to calculate critical financial metrics. COGS typically includes:

1. Raw materials: The cost of materials used to create the product.
2. Direct labour: Wages paid to workers directly involved in production.
3. Manufacturing overhead: Costs like factory rent, utilities, and equipment depreciation.

The basic formula for calculating COGS is:

COGS=BeginningInventory+Purchases−EndingInventoryCOGS=BeginningInventory+Purchases−EndingInventory

Understanding COGS is crucial for:

• Determining gross profit (Revenue - COGS)
• Calculating profit margins
• Making pricing decisions
• Evaluating operational efficiency
• Tax reporting purposes

COGS is reported on the income statement and directly impacts a company's bottom line. Lower COGS relative to revenue generally indicates higher profitability.

Real-world examples

1. Apple's iPhone production

   Apple's COGS for iPhones includes costs of components like screens and processors, labour in assembly plants, and a portion of manufacturing facility costs. In 2022, Apple reported a cost of goods sold (COGS) of $218.8 billion, reflecting the high costs associated with producing its premium devices.

2. Coca-Cola's beverage production

   Coca-Cola's COGS include ingredients like sugar and flavouring, packaging materials, and direct labour costs for bottling operations. In 2022, Coca-Cola reported a cost of goods sold (COGS) of $13.2 billion, demonstrating the significant costs involved in producing and packaging beverages on a global scale.

3. Nike's footwear manufacturing

   Nike's COGS encompasses materials like rubber and textiles, labour costs in contracted factories, and shipping of materials. In fiscal year 2022, Nike reported a cost of goods sold (COGS) of $24.4 billion, highlighting the substantial costs involved in producing and sourcing athletic footwear and apparel.

4. Amazon's e-commerce operations

   For Amazon's retail operations, COGS includes the purchase price of products sold, inbound shipping costs, and direct labour for fulfilment centres. In 2022, Amazon reported a COGS of $289.7 billion, reflecting the massive scale of its retail operations.