Differentiating Cost of Goods Sold and Cost of Sales for Businesses

The article breaks down how businesses distinguish cost of goods sold (COGS) from cost of sales, focusing on direct costs tied to producing goods versus delivering services. It notes that manufacturers typically report COGS, covering materials and production labor directly used, while excluding indirect expenses such as marketing, distribution, and sales. Service companies may use “cost of sales” for delivery expenses. A simple COGS formula is provided: COGS equals beginning inventory plus purchases during the period minus ending inventory. The piece then explains that cost of sales is a broader measure in service contexts, encompassing direct service costs such as consultant salaries and travel to clients. It also references Ford’s Q4 2023 earnings report, describing what Ford includes in cost of sales—material and freight costs, warranty and recall costs, labor related to development and production, depreciation and amortization, and other associated expenses—while excluding selling and administrative costs.