Cost of Goods Sold vs. Operating Expenses

Cost of Goods Sold vs. Operating Expenses

September 13th, 2011 @

Cost of Goods Sold vs. Operating Expenses

While the COGS (cost of goods sold) and OE (operating expenses) are both expenses; but they are different. If you had no sales, you would basically have no COGS.

COGS is an expense that is incurred because a sale takes place. For example in a pizza shop, the dough and toppings (sauce, cheese, pepperoni, etc.) are the COGS related to selling the pizza.

OE are the basically fixed monthly cost of running your business. Regardless of the level of your sales, the rent, utilities (electric, gas, phone, etc.) are the same.

Here is how to test to determine if an expense is a COGS or OE. If you had no sales in a month, would you incur the expense? For example, is a pizza box an OE or COGS? If you had no sales would you need to buy more pizza boxes – no, thus pizza boxes that some might consider an OE supply expense is actually a COGS expense.

Having properly separated COGS from OE, we can begin to make some important calculations related to your business. One of these is Gross Profit.

Total Sales less total COGS equals Gross Profit. By dividing the Gross Profit by the Total Sales you obtain the Gross Profit Margin. For example

Total Sales $40,000 100%

Total COGS -$21,000 52.5%

Gross Profit $19,000 47.5% ($19,000/$40,000)

Having determined Gross Profit, how is your business doing? In this example, the Gross Profit is 47.5%. Is this good? The answer is determined by the industry you are in. The 47.5% may be excellent in one industry but not in another.

Need help understanding more about COGS vs. OE? We’re just a phone call away.


Category : Blog &Business Advice &Featured

24 Comments → “Cost of Goods Sold vs. Operating Expenses”


  1. bryansayler

    2 years ago

    Tom, this is a great article. Thanks!

    Reply

    • Tom Willett

      2 years ago

      Thanks Bryan

      Reply

  2. renren876

    2 years ago

    I dont get it,

    Reply

    • Tom Willett

      2 years ago

      What kind of business do you have?

      Reply

  3. Greg

    1 year ago

    Another related question is payroll. If you have an employee who is paid $10 an hour, and say for the sake of example, 30% of their time is directly associated to making sales (checking out merchandise at the cash register) and the other 70% is associated to other tasks such as stocking shelves, dusting, etc… would $3 be assigned to COGS and $7 to OE, or is all assigned to OE?

    Reply

  4. Annabell

    1 year ago

    Great description of what this means. Thanks for the explanation!

    Reply

  5. gwen

    1 year ago

    What about a service company? Say I have hosting fees that I have to pay every month regardless of the amount of sales, but if my sales grow so does my hosting fees. Would this be OE or COGS? Is it both, and should I record part for OE and part for COGS?

    Thank you

    Reply

  6. afzal

    1 year ago

    Thatz really a clean and clear presentation… Thanks friend..!!!

    Reply

  7. buggirl

    1 year ago

    i work for a company that does termite work. If we sell a fumigation i.e. tenting a house, the cost of the independent contractor who actually bags the house would be a COGS right? The commission for the salesman who sold the job is a COGS? The referral fee to the company who referred the person who eventually got their house bagged is a cogs? A referral fee paid for a referral that did not turn into a job is an expense? We are also paying the salesman as an employee i.e. taking out payroll taxes, however he works on commission and only earns money if he sells something, he should be paid and an IC not an employee right?

    Reply

  8. K.P.VALSAN

    1 year ago

    I would like to know the “cost sales” expenses are added for arriving days cash on hand or just operating expenses.

    Reply

  9. outbackd

    1 year ago

    Thanks Tom! your explanation makes my tasks much easier.

    Reply

  10. gamachis tasfaye

    1 year ago

    thank you

    Reply

  11. Alexander

    1 year ago

    Thank you very much Tom for the simple and very clear explanations.
    What about travel expenses related to new business? Can it be included in COGS?
    Thank you

    Reply

  12. Anupam

    11 months ago

    I do understand that COGS & OPEX aren’t the same. But isn’t COGS a part of OE. Acc. to me COGS, SG&A & R&D costs are all a part of OPEX. Please correct me if I’m wrong. Thanx!!!

    Reply

  13. Lyne Bergeron

    11 months ago

    Great explanation it will serve me well. Thank you very much.

    Reply

  14. paula

    8 months ago

    Absolutely clear and concise article. Nothing extra that we don’t need based on the face value of the question. Well done.

    Reply

  15. Rachel Brophy

    5 months ago

    Thank you! This was very helpful.

    Reply

  16. Ferg

    5 months ago

    Thanks for the article Tom.
    My question, which side does labor cost goes into?
    Do we need to seperate between executive’s salary and hard labor’s?

    Reply

  17. SusieQ

    4 months ago

    Thank you for clearly explaining the difference – nicely written. It would be great to see a follow-up article how to categorize COGS so they allocate properly in QuickBooks. Using your example of the pizza box, if you bought 500 pizza boxes, how do you allocate one box to each individual sale.

    Reply

  18. Shari

    4 months ago

    Thanks good information helps clear the fog

    Reply

  19. Tanya

    3 months ago

    I’ve just read about 5 explanations for the difference between cogs and expense and this is the best one I’ve read! Thank you!

    Reply

  20. Vidya

    2 months ago

    Thanks for this easy to understand explanation. It really helps. One question if I want to calculate EBITDA I would still add COGS and any other operating costs (including personnel costs) and subtract it from my revenues, right?

    Reply

  21. Vincent

    2 months ago

    Thank you so very much. This came in handy.

    Reply

  22. Patrick

    1 month ago

    I’m in the construction business do you include your operating expense when bidding a job?

    Reply

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