Question:
How do I determine the Cost of Goods Sold for an item?
Answer:
I tell my clients that Cost of Goods Sold (COGS) is any cost incurred that directly relates to getting the sold goods out the door.
I have them ask the question “Would you have this expense if you hadn’t made the sale?”
Typical examples of COGS are product purchased for resale, subcontractors or vendors you hire specifically for preparing a product for sale, shipping materials like packaging, freight costs of receiving the resale product and shipping the product to your customers, payroll/labor costs of your employees who are directly related to preparing the goods to be sold or shipped out (would you have hired them if you didn’t have the product to sell?).
Costs that are not directly related to getting the product out the door are considered Expenses or Operating Expenses and include things like your liability insurance premiums, telephones, office supplies, office-related postage and delivery, advertising, clerical payroll, employee benefits and health insurance for the employees and would be considered costs of managing the paperwork for the overall business,
Again, if you would have the expense if you weren’t selling your product or service, it is an expense considered overhead. If you have the expense only because you selling the product or service, it’s COGS.
This is a very simplistic definition and there are certainly areas of disagreement among different people, but if you relate it strictly to your business you should be able to come up with your COGS vs Expenses.
In a nutshell…
Cost of Goods sold is anything and everything that costs you money to buy items for resale, have them delivered to your store to sell, package and label them, import them, fix them or otherwise make them fit to sell.
If it costs you $100 to purchase an item, $5.00 to have each one shipped to your store, it costs $2.50 each in import duty and taxes, $10.00 each to have them inspected by QC, and $5.00 each to fix little problems with each item, your COGS is $122.50.
Nataly
“I” would consider it COGS. But really it’s your accountant/tax preparer that you should be speaking with. I offer general setup advice and your tax preparer might have a different opinion simply because he knows far more about your business than I do.
is this the same for services? Say we do an excavation job that requires us to put up silt screens to perform the service. Is the silt screen COGS?
I would put it under COGS, but you should ask your tax preparer/account what his suggestion would be that would best fit your company.
If I have an independent contractor who does the estimating, bidding and overall project management of the project he won, is the commission I pay him considered Cost of Goods Sold or is it an overhead expense? His commission is a draw against the profits on a monthly basis. He gets 40% of gross profit. Thanks for your opinion.