How is COGS Calculated?

Examples of Items That Can Be Included in COGS (Cost of Goods Sold):
COGS includes direct costs that are directly tied to the production or acquisition of goods sold during a specific period. Here are examples:

1. Direct Costs

• Raw Materials: The materials used to produce a product (e.g., wood for furniture, fabric for clothing).
• Purchased Products: Inventory purchased for resale (e.g., products bought by a retailer).
• Labor Costs: Wages of employees directly involved in production (e.g., factory workers, assembly line staff).
• Production Supplies: Consumables used in manufacturing (e.g., glue, nails, or machine lubricants).
• Freight-In Costs: Shipping charges to bring raw materials or inventory to your location.
• Manufacturing Overhead: Costs indirectly tied to production (e.g., factory utilities, depreciation of manufacturing equipment).
• Packaging Costs: Materials used to package products for sale (e.g., boxes, wrapping).
• Inventory Adjustments: Losses from inventory shrinkage or theft are typically not included in COGS.

Examples of Items That Generally Should Not Be Included in COGS:
These costs are not directly tied to production or acquisition of goods sold and are instead considered operating expenses or other non-COGS categories.

1. Administrative and General Expenses

• Office Rent: Costs for administrative office space.
• Administrative Salaries: Wages for office staff, accountants, and managers not involved in production.
• Utilities for Office: Electricity, water, and heating for non-production facilities.

2. Selling Expenses

• Marketing and Advertising: Costs of promoting the business or products (e.g., social media ads, sponsorships).
• Sales Commissions: Payments to sales staff for making a sale.

3. Storage and Distribution

• Freight-Out Costs: Shipping costs to deliver goods to customers (considered an operating expense).
• Warehouse Costs: Storage costs unless directly tied to manufacturing.

4. Non-Production Supplies

• Office Supplies: Items like paper, pens, and computers.
• Non-Direct Maintenance: Repairs and maintenance not directly related to manufacturing equipment.

5. Unrelated Activities

• Research and Development (R&D): Costs associated with developing new products or improving existing ones.