COGS and SG&A

Cost of goods sold

- COGS – Cost of Goods Sold or Cost of Sales is the total value of
goods/products/merchandise sold in a year
- COGS is calculated by adjusting the total costs of a year (manufacturing or purchasing
– not SG&A), with the inventory values, to make the total costs coherent with total
revenues
o Total sales, obviously, are the value of what has been sold
o Total costs, without any adjustment, are the value of what has been bought
(raw material, components) or the cost of what has been produced
(manufacturing costs)
o The adjustments are necessary to grant coherence (comparability) between
Revenues and Costs and calculate Gross Profit or Gross Margin
o These clarifications are particularly relevant in manufacturing and trading
companies, so, companies selling physical products
 In service companies or companies selling intangible products
(without inventories), the COGS calculation is less complex
- Within the IS COGS is often reported in a more detailed way – in particular:
o For a manufacturing company, COGS is:
 Production costs (typically listed in detail)
 +/- the change in inventory

o For a trading company, COGS is:

 Purchases (=cost of merchandise purchased)
 +/- the change in inventory
Selling vs general & administrative costs
- Selling expenses typically include:
o Sales salaries, commissions and bonuses and related costs (including social
security and pension costs)
o Advertising and promotion costs
o Warehousing costs
o Transportation costs
o Costs related to fixed assets used in the selling activity (including
depreciation, maintenance costs, rents, etc.)
o ...
- General and Administrative expenses typically include:
o Administrative staff salaries, bonuses etc. and related costs (including social
security and pensions costs)
o Directors’ executive salaries and related costs
o Stationery, telephone, legal and tax services
o Costs related to fixed assets used for the G&A activity (e.g. depreciation,
maintenance of buildings, rents, etc.)
o Research costs
o Professional fees
o …