COGS (cost of goods sold), cost of sales, direct cost, or job cost all mean the same thing. Although it is usually self-explanatory, sometimes COGS is mislabeled as expense. So, let’s take a closer look.
We say anything the customer takes with them or that we leave with the customer is COGS. Inventory is the obvious. Materials for a job makes sense, too. But there’s more. Ask the question: would I have this expense if I hadn’t done this particular job? If the answer is yes, then it’s an operating expense (overhead); if the answer is no then it’s COGS.
What about labor? Subcontracted labor for a project seems obvious. But don’t forget the designer’s salary is COGS, too. So is the assembly worker producing the materials; any direct labor is COGS. If an employee spends half a day on a job and half a day filing at the office, then bill half a day as COGS and half a day as operating expense. Your bookkeeper’s salary is an operating expense because it would have been an expense even without that particular job.
Equipment rentals related to the job are also COGS. And don’t forget any fuel or maintenance for the equipment. Also, supplies, storage fees, and shipping expenses that relate directly to the job should be listed as cost of sales.
Why does it matter? On your Taxes and Income Statement (or Profit and Loss) it’s listed separately. Revenue minus COGS gives us Gross Profit; Gross Profit Minus Operating Expenses gives us Net Profit.
Revenue (Sales)
– COGS
= Gross Profit
– Operating Expenses
= Net Profit
Have fun! And be nice to your bookkeeper.