What is Cost Of Goods Sold?
1531 reads · Last updated: December 5, 2024
Cost of goods sold refers to the direct costs of producing the goods sold by a company. This amount includes the cost of the materials and labor directly used to create the good. It excludes indirect expenses, such as distribution costs and sales force costs.Cost of goods sold is also referred to as "cost of sales."
Definition
The cost of sales refers to the production cost of products that have been sold or the service cost of services that have been provided, as well as other business costs related to sales. It includes two parts: the main business cost and other business costs. The main business cost is the cost incurred by the enterprise in selling goods, products, semi-finished products, and providing industrial services. Other business costs are the costs incurred by the enterprise in selling materials, renting out packaging materials, and renting out fixed assets.
Origin
The concept of cost of sales originated from accounting and has evolved with the increasing complexity of business operations. The earliest cost accounting can be traced back to the Industrial Revolution when companies needed more precise calculations of production and sales costs to improve efficiency and profitability.
Categories and Features
The cost of sales is mainly divided into two categories: main business cost and other business costs. The main business cost involves the production and sales costs of a company's core products or services and is usually the major part of a company's cost structure. Other business costs include costs from non-core activities, such as material sales or asset rentals. Main business costs typically have higher predictability and stability, while other business costs may be more volatile.
Case Studies
Case 1: Apple Inc. details the cost of sales in its financial statements, including the material and manufacturing costs of products like iPhones and iPads. These costs are classified as main business costs. Case 2: Walmart's financial statements also show the cost of goods sold, which includes the cost of purchasing goods and logistics costs, categorized as main business costs.
Common Issues
Investors often confuse the cost of sales with operating expenses. The cost of sales is directly related to the production of products or services, while operating expenses include indirect costs such as management and marketing. Additionally, fluctuations in the cost of sales can affect a company's gross margin, requiring careful analysis.
