COGS vs. Cost of Sales (With FAQs)
By Indeed Editorial Team
Updated August 17, 2021 | Published September 25, 2020
Updated August 17, 2021
Published September 25, 2020
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
The difference between cost of goods sold and cost of sales is that the former refers to the company’s cost to make products from parts or raw materials, while the latter is the total cost of a business creating a good or service for purchase
An example of cost of sales is direct labor and direct materials
To quickly calculate the cost of sales, add purchases to your beginning inventory, then subtract the ending inventory from that total
When you look at a company's income statement, it’s important to understand both the cost of goods sold (COGS) and the cost of sales. Each term as they relate to a company's finances helps you to make strategic investment decisions for the future.
While these terms are often used interchangeably, some unique differences set them apart. In this article, we define COGS and cost of sales, explain how to calculate cost of sales and answer some frequently asked questions.
What is COGS?
Cost of goods sold (COGS), refers to a company’s cost to make products from parts or raw materials. It can also refer to the cost of buying products and reselling them.
COGS have two types: direct costs and indirect costs.
This refers to the cost directly tied to making a particular good or service. Examples of direct costs include:
the cost of buying raw materials or parts
Analyzing a company’s direct cost of manufactured goods can help you determine its future inventory, as the company can create more goods when raw material is low.
These costs go beyond what’s incurred from producing a good or service. In other words, indirect costs aren't readily tied to a company’s particular good or service. Examples of indirect costs include:
What is the cost of sales?
Also known as the cost of revenue, the cost of sales refers to the total accumulated cost a business incurs to create a good or service for its customers to purchase. Like COGS, the cost of sales includes all direct costs associated with these goods and services.
While the cost of sales can let you know the operational costs of producing a good or service, it can also help in another regard. For example, if the cost of sales continues to rise but revenue remains the same, it could indicate an increase in input costs. It also could mean the mismanagement of other costs directly associated with the production of a company’s goods or services.
The difference between cost of goods sold and cost of sales
While some companies list either COGS or cost of sales on their balance sheets, some include both terms. Since they're often used interchangeably, it can create confusion as to how they truly differ.
While both include all direct costs used for a company’s goods and services, here are some differences that set them apart:
Analysis: Cost of sales analyzes the direct and indirect costs related to a company's sale of its goods and services, while COGS analyzes the direct costs associated with the production of a company's goods.
Income statement location: Cost of sales is included before the EBIT margin (the operating earnings over operating sales) on an income statement. COGS is listed after revenue, as it includes all direct costs associated with revenue generation.
Amount: Since cost of sales includes additional costs and COGS focuses on a company’s direct costs, when both are used, the COGS is always less than the cost of sales.
Calculation: Whereas the calculation for cost of sales reflects the number of goods sold, the calculation for COGS reflects the number of goods a company manufactures.
Tax deduction: While cost of sales isn’t tax-deductible, you can deduct COGS from a company’s gross receipts to determine a business’ yearly gross profit. Claiming COGS and other business expenses can increase a company’s tax deductions while lowering business profit.
COGS vs. cost of sales: FAQs
The following are answers to some common questions about cost of sales and COGS.
Who uses COGS and cost of sales?
Typically, companies involved in the manufacturing or trading of goods or services use “cost of goods sold,” while retail companies use “cost of sales.” However, COGS is also used in a more general sense and for accounting purposes.
Businesses that only offer services as opposed to products often use cost of sales or cost of revenue instead of COGS because they don't have operating expenses tied to tangible goods. However, service providers may offer small products, such as resorts selling branded souvenirs or airlines selling food and drinks to passengers. When they do, these items are categorized as costs of goods sold.
How is COGS used to determine gross profit?
When you subtract COGS from a company’s revenue, you’re left with its gross profit. Knowing this can help you determine a company’s efficiency in regards to its labor and supply management.
Is cost of sales an asset or expense?
While operating expenses would include cost of goods sold on a balance sheet, cost of sales or COGS are related to assets. A cost can become an expense when the cost associated with an asset purchase turns into the cost of doing business.
What is the formula for cost of sales?
It takes a few steps to calculate the cost of sales, but the formula below will help transfer costs quicky to an income statement:
Beginning Inventory + Purchases - Ending Inventory = Cost of Sales
Any other cost-analysis terms to know?
Some related terms to familiarize yourself with include:
Operating expenses: Ongoing costs a company incurs when running its business. Although similar to COGS, operating expenses have their own section on an income statement and don't tie to the production of goods or services.
Cost of revenue: The total amount a company pays to manufacture or deliver a product or service to its customers.
Net sales revenue: While net sales refers to a company’s total gross sales minus its allowances, discounts and returns, net sales revenue refers to the money a company generates from its net sales.
Cost control for profit: The process of determining and lowering expenses to raise company profits.
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