![cost of revenue vs cogs cost of revenue vs cogs](http://image1.slideserve.com/3115241/gross-profit-and-cost-of-goods-sold1-n.jpg)
Having low COGS can impact your business in many ways. That means that you are delivering your products and services very efficiently and can have a solid gross margin. Typically, having lower direct costs is better. Gross margin is your revenue minus your direct costs: Gross Margin = Revenue – Direct Costsīecause gross margin is a good top-line measure of how efficient your company is at delivering its products and services, keeping an eye on your direct costs helps you understand how efficient your company is. When your direct costs go up, it might be time to start looking for new suppliers or to try and cut costs in your business.ĭirect costs also directly impact your gross margin. If they are going up, perhaps your suppliers are starting to charge you more, or perhaps fuel costs are going up. Understanding direct costs helps you keep an eye on how much it is costing your company to deliver its product or service.
#Cost of revenue vs cogs how to
How to calculate and understand your direct costs And, since that labor was probably paid for in the form of salaries, it wouldn’t be included. The primary expense of delivering the consulting project is the labor that went into the project. If that report is printed and bound, then the direct costs of delivering that consulting are the cost of paper and binding. While product-based companies typically have higher direct costs because they are dealing with physical goods, service companies’ direct costs are usually fairly low or non-existent.įor example, a consulting company may provide a client with 100 hours of consulting that culminates in a final report. That staff might work on multiple products and multiple projects, so it’s difficult to determine exactly how much of their salaries should be attributed to producing a specific product. The reason for this is that your company is incurring the expense of having staff on hand even if you don’t sell a single product.
![cost of revenue vs cogs cost of revenue vs cogs](https://d2vlcm61l7u1fs.cloudfront.net/media/9df/9dfc259b-468d-482e-8c3e-962f629e1cdd/php3yJgGr.png)
#Cost of revenue vs cogs software
For example, a car company may decide to include manufacturing labor costs for assembling their cars, while a software development company might include labor costs as an indirect cost.ĭirect costs are expensed as you sell your product or service, so most companies choose to exclude labor costs from COGS. One common expense that can be difficult to label is labor. To give you an idea, some common operating expenses include:
![cost of revenue vs cogs cost of revenue vs cogs](https://image.slidesharecdn.com/howtoprepareayearendfinancialreport-151204055512-lva1-app6891/95/how-to-prepare-a-yearend-financial-report-7-638.jpg)
Typically selling, general, administrative and any other overhead should be listed as operating expenses over COGS. Both are expenses incurred from the operation of your business, but operating expenses are not directly tied to production. It can be incredibly easy to confuse operating expenses with direct costs (COGS). As a general rule of thumb, if you can’t directly associate a specific cost with the sale of a single product, then that cost should not be a direct cost. The costs of producing what you sell are your part of your COGS.ĭeciding what to include in your direct costs varies from one type of business to another. You may have had to purchase raw materials that you then turned into a product. You had to either make or buy the product you sold. Think of direct costs as the exact cost you incur to sell one of your products. If you sell services, you probably also have direct costs, but they will be a much smaller percentage of your revenue than they will be for a product company. What is cost of goods sold?Ĭost of goods sold (COGS) is a great alternative name for direct costs because it refers to the cost of creating the products that a company sells. These costs include the direct expenses for materials used to create the product, and potentially any labor costs that are exclusively used to create the product.ĭirect costs always exclude indirect expenses such as marketing expenses, rent, insurance, and other similar expenses.ĭirect costs (or cost of goods sold) shows up on the profit and loss statement and can be subtracted from revenue to calculate the gross margin of a company. What Are Direct Costs? Cost of Goods Sold Explained Posted JBy Noah Parsons Cost of goods sold definitionĭirect costs (also known as costs of goods sold-COGS) are the costs that can be completely attributed to the production of a specific product or service.