Cost of Goods Sold - COGS

By Joshua Kennon

Job Vacancy Indonesia, Employee, Vacancy

 

Cost of Revenue, Cost of Sales, Cost of Goods Sold (COGS)
Cost of goods sold (COGS for short) is the expense a company incurred in order to manufacture, create, or sell a product. It includes the purchase price of the raw material as well as the expenses of turning it into a product. Cost of goods sold (COGS) is also known as cost of revenue or cost of sales.

Going back to our pizza parlor example, your cost of goods sold (COGS) include the amount of money you spent purchasing items such as flour and tomato sauce.

The cost of goods sold per dollar of sales is going to be different depending upon the type of business you own or in which you buy shares of stock. A licensing company or law firm will have virtually no cost of goods sold because they are selling a service and not a tangible product.

Before you invest in a business, you'll want to research the industry you are examining and find out what is considered "good". For corporations that drill for oil, for instance, one of the most important figures you need to consider is the cost per barrel to get the oil out of the ground. This is, in effect, the cost of goods sold for the oil company. If one firm can get crude at far lower costs than its competitors, it has a distinct advantage and will result in more profit flowing to the owners or shareholders.

Another thing you want to try and figure out is how exposed a company is to a particular input cost. For Southwest Airlines, the cost of jet fuel (and thus, oil) is the most important cost the company has. For Starbucks or Folgers, now a division of J.M. Smucker's, it's coffee. For Coca-Cola, sugar prices are extremely important. One of the reasons some investors are extremely successful is because they know the exact relationship between profits and cost of goods sold. It's been noted that Warren Buffett knows the per 12 ounce can profitability figures for a serving of Coca-Cola and watches sugar prices regularly. If you were a small candy company, or even a giant like Coke, periods of time such as April to July of 2009 would have been hard for your business as sugar prices nearly doubled without warning. As an investor, you need to be aware of the risk a business faces due to unexpected higher cost of goods sold regardless of if you are buying shares of stock, purchasing a local business, or launching your own start-up.