List of Partners vendors. Your Money. Personal Finance. Your Practice. Popular Courses. Operating expenses refer to expenditures that are not directly tied to the production of goods or services, such as rent, utilities, office supplies, and legal costs. Cost of goods sold refers to expenses directly related to the production of a product, such as the materials needed to assemble a product and the transportation needed to bring goods from a distributor to a retailer. Both types of expenses are recorded as separate line items on a company's income statement.
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In actuality, some costs recorded within the cost of goods sold accounts may actually be period costs , and so may not necessarily be directly associated with goods or services, and will not be allocated to them.
Also, there may be production-related expenses such as facility rent even when there is no production at all, as would be the case when there is a union walkout. In these cases, it is possible for there to be a cost of goods sold expense even in the absence of sales. The cost of goods sold can vary substantially over time, due to all of the following issues:.
Changes in the purchase price of raw materials. Changes in the costs of overhead allocated to products. Changes in the amount of scrap and spoilage experienced.
Many service-based companies have some products to sell. For example, airlines and hotels are primarily providers of services such as transport and lodging, respectively, yet they also sell gifts, food, beverages, and other items.
These items are definitely considered goods, and these companies certainly have inventories of such goods. Both of these industries can list COGS on their income statements and claim them for tax purposes. Both operating expenses and cost of goods sold COGS are expenditures that companies incur with running their business. However, the expenses are segregated on the income statement. Examples of operating expenses include the following:. COGS can easily be manipulated by accountants or managers looking to cook the books.
It can be altered by:. When inventory is artificially inflated, COGS will be under-reported which, in turn, will lead to higher than the actual gross profit margin, and hence, an inflated net income. By contrast, fixed costs such as managerial salaries, rent, and utilities are not included in COGS.
Inventory is a particularly important component of COGS, and accounting rules permit several different approaches for how to include it in the calculation.
COGS does not include salaries and other general and administrative expenses. However, certain types of labor costs can be included in COGS, provided that they can be directly associated with specific sales.
For example, a company that uses contractors to generate revenues might pay those contractors a commission based on the price charged to the customer. In theory, COGS should include the cost of all inventory that was sold during the accounting period. For this reason, companies sometimes choose accounting methods that will produce a lower COGS figure, in an attempt to boost their reported profitability. Internal Revenue Service. OpenStax, Rice University , Accessed Oct.
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Understanding COGS. Cost of Revenue vs. Operating Expenses vs. Limitations of COGS. Key Takeaways Cost of goods sold COGS includes all of the costs and expenses directly related to the production of goods.
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