#COST OF REVENUE VS COGS HOW TO#

Recording COGS and operating expenses in your booksĬost of sales and operating expenses are both types of expense accounts. Your total operating expenses for the period are $4,850. To find your total operating expenses for the month, add up your expenses: Each month, you pay $800 in rent, $150 for insurance, $3,500 for payroll costs, $100 for marketing, $250 for utilities, and $50 for office supplies. To learn more about what business expenses you can deduct, check out the IRS’s website. The IRS also allows businesses to deduct operating expenses if the business is for-profit. Take a look at your operating budget to see where you can cut costs. Businesses can reduce operating expenses by automating tasks, cancelling unused services and subscriptions, and shopping around before making a purchase. However, you have to be careful to ensure you’re not sacrificing quality and your business’s integrity. You might try to reduce operating expenses to give profits a boost. An increase in operating expenses means less profit for your company. Like COGS, operating expenses can show you how profitable your business is. To calculate your total operating expenses, add all of your operating costs up.

Salaries and wages (other than direct labor)Īgain, operating expenses do not include cost of goods sold (e.g., direct materials and labor).

Here are some examples of operating expenses: It includes all of the expenses that don’t fall under the cost of goods sold category and aren’t directly tied to the production of the good or service. Operating expenses might also be referred to as SG&A (sales, general, and administrative expenses).Įssentially, an operational expense is the opposite of COGS. An operating expense is an ongoing cost of running a business.

Operating expenses (OPEX), also known as operating expenditures or operational expenses, are costs companies incur during normal operations to keep the business up and running. Your cost of goods sold for the quarter is $6,000. Plug your totals into the COGS formula to find your cost of goods sold for the period. Say your business has a beginning inventory of $5,000, makes $1,500 in purchases during the period (quarter), and has an ending inventory of $500. Not to mention, it can help you calculate your business’s overall profit. Your COGS can help you set prices that give you a healthy profit margin. And voila! You have your cost of goods sold. Subtract the inventory you did not sell at the end of the period. Add the cost of what you purchased during the period. Your beginning inventory is the leftover inventory from the previous period. Use the following formula to determine your total COGS during a period (e.g., month, quarter, year):ĬOGS = Beginning Inventory + Purchases During the Period – Ending Inventory

To find the cost of goods sold on a product, add up the cost of raw materials and direct labor. It does not include other costs, like electricity to run machinery. When calculating your cost of goods sold, do not factor in costs like utility, marketing, rent, and shipping expenses.įor example, the cost of goods sold for a cup of coffee accounts for things like the to-go cup, sleeve, coffee filter, water, coffee beans, etc. Your COGS includes the direct costs of producing your offerings, such as:ĬOGS does not include indirect expenses, like overhead costs. The cost of goods sold, also known as cost of sales or services, is how much it costs to produce your products or services. To understand the difference between cost of goods sold and operating expenses, check out the overview and examples of both below. Failing to accurately record them can throw off your financial statements and books.

You must record them separately on your business’s income statement. operating expensesĬOGS and operating expenses are both costs you incur during your business’s daily operations.

#COST OF REVENUE VS COGS HOW TO#

operating expenses and how to tell the difference when doing your books.Ĭost of goods sold vs.

But what’s the difference between the two? Read on to learn about cost of goods sold vs. These expenses fall into two categories: cost of goods sold (COGS) or operating expenses. Part of running a business is recording day-to-day operating costs in your books.

Cost of revenue vs cogs