What’s a cog- well it’s an acronym and represents Costs of Goods Sold? Nearly every industry uses this term and while we all nod our heads in agreement do we really know what that means?
On the surface it doesn’t take much explanation. Pretty straight forward but here is the trick it’s not actually all that straight forward when we take a deeper look at it and it’s only worthwhile if we take a deeper look at it.
The easiest example that I know of is the Peanut butter and jelly sandwich. So let’s take a look at that as an example of COGS. COGS cover what you have to purchase in order to make and sell your product.
Peanut Butter and jelly Sandwich:
Two slices of bread
2 T peanut butter
2T jam or jelly
The parchment bag it is wrapped in in order to hand it to the customer
The cutting board it was made on? – NOPE
The labor time? – Well…. Yes and no and kinda. Ugh! The labor that it requires in order to build the sandwich is known as direct labor and that is indeed included in COGS. But the server that is paid to distribute the sandwich to the customer in the dining room is not. That server wage is considered an indirect cost. And only direct costs go into COGS.
It took me a while to really wrap my mind around the difference in categories. But here is the important difference: anything that has a direct cost to that particular item is part of a COG. Direct being the operative word. An indirect cost is the cost of rent and the server that took and delivered the order. You would have to pay both of those anyway regardless of that individual sandwich.
Give it a whirl! And please send me the results; I’d love to see what you’ve come up with.