Cost of Goods Sold Defined

Cost of Goods Sold (COGS) is the total cost of the goods or services sold to customers; it is the costs that go into the creation of the products a company sells or the services the company delivers. The Cost of Goods Sold is reported on the income statement after sales revenues. You deduct the COGS from revenue to determine the company’s gross profit.

Many companies mistakenly only include inventory or inventory and freight/shipping in the COGS calculation. However, the COGS represents the TOTAL of ALL the costs directly related to the purchase and delivery of all the goods or services that have been sold during the accounting period. Therefore, the COGS calculation includes the inventory sold to the customer, supplies used to create or deliver the inventory or service, sales commissions paid to sales people for the goods or services they sold, freight / shipping to the company and to the customer, and the labor of the individuals directly responsible for creating the good or delivering the service.

(Note: If the company charges its customers a separate delivery charge, then the cost of freight / shipping to the customer is NOT included in COGS. For example, an auto manufacturer does not include freight to the dealership in its COGS. Instead, the manufacturer assesses a delivery charge to the dealership, and the dealership charges the car buyer for delivery.)

For example, for , LLC, the COGS therefore includes purchasing discounts received from vendors (purchasing discounts are a reduction to COGS), the cost of equipment, field expenses, inventory costs, truck expenses, field labor, and shop labor. In addition, labor includes ALL of the costs of each individual dedicated, or primarily dedicated, to delivering oilfield services. Thus, field labor includes the total of wages, taxes, insurance, medical, payroll taxes, retirement plan, and uniform expenses for each person classified as field labor; shop labor includes the same for each person classified as shop labor.

In other words, COGS includes all direct expenses that are directly assignable to goods and services sold.

Cost of Goods Sold Format (AOS old):

The schedule of cost of goods had been calculated as follows:

Inventory Cost opening
Add Purchases

Less Returns and allowances

Subtract Discount

Add Field Expense

Add Truck Expense

Add Equipment Expense

Subtract Discount

 

This calculation COMPLETELY ignores labor costs. The new calculation for COGS will be as follows:

 

The schedule of cost of goods had been calculated as follows:

Inventory Cost opening
Add Purchases

Less Returns and allowances                                           

Subtract Discount

Add Field Expense

Add Truck Expense

Add Equipment Expense

Add Field Labor

Add Shop Labor

Equals COGS

 

 

Direct Expenses and Indirect Expenses:

Please see the schematic below for a visual and written description of direct expenses vs. indirect expenses.

Expenses

Direct Expenses, including the following: purchase price of inventory or goods; purchase price of services (i.e., subcontractor or independent contractor fees), carriage on goods purchased; wages, benefits, and taxes on goods produced or services delivered (direct labor costs); insurance on goods in transit; freight, duty or similar taxes, etc.

Indirect Expenses, including the following: salaries paid, rent, insurance on building; printing charges; marketing fees; legal and accounting charges, etc.