A standard set of business accounts will look like this, but what does “cost of goods sold” or “COGS” mean?:
The “cost of goods sold” includes anything that has directly gone into the product, which usually includes the materials and the labour.
It is very important to not include anything that is not in the physical product you are selling, such as wasted materials and labour where the individual is not making the product e.g. security guard.
Cost of goods sold is often more relevant for a business producing a product, compared with a business providing a service.
Test your new knowledge!
You are creating the accounts for a business that produces charm bracelets.
Which of these expenses should be included within ‘cost of goods sold’?
Gold bracelets
Wages for a manager who is overseeing, but not producing products
The manager’s work has not physically gone into the product.
Wages for a staff member while they spent two hours creating charms
Fluid for cleaning the machines
This has helped the machines to run, but it has not physically gone into the products
Tea and coffee for staff
This may have gone into the staff, but it has not physically gone into the products.