Cost of goods sold (COGS)

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:

Raw materials: The cost of materials used to create the product.
Direct labour: Wages paid to workers directly involved in production.
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

Case study: 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 of producing its premium devices.

Case study: 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.

Case study: 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.

Case study: 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.

Frequently asked questions about accounts payable?

1) How does accounts payable differ from accounts receivable?

Accounts payable represents money a company owes to suppliers, while accounts receivable is money owed to the company by customers.

2) What happens if accounts payable increases?

An increase in AP may indicate that the company is purchasing more goods or services on credit or delaying payments to conserve cash flow.

3) Why is automation important in accounts payable?

Automation reduces processing times, minimizes errors, ensures compliance with payment terms, and provides better visibility into financial obligations.