COGS (Cost of Goods Sold) and SG&A (Selling, General, and Administrative Expenses) are two critical components of a company’s income statement, each serving different purposes in financial analysis.
COGS (Cost of Goods Sold)
- Definition: COGS refers to the direct costs attributable to the production of the goods sold by a company. This includes the cost of materials and labor directly used to create the product.
- Components: COGS typically includes:
- Raw materials
- Direct labor
- Manufacturing overhead (e.g., factory utilities, equipment depreciation)
- Importance: It is a crucial figure as it directly affects a company’s gross profit. The formula for gross profit is: Gross Profit=Revenue−COGS\text{Gross Profit} = \text{Revenue} – \text{COGS}Gross Profit=Revenue−COGS
SG&A (Selling, General, and Administrative Expenses)
- Definition: SG&A represents the indirect costs associated with running a company. These are the expenses not directly tied to the production of goods but are necessary for overall operations.
- Components: SG&A typically includes:
- Selling expenses: Costs associated with selling the product (e.g., marketing, sales commissions, distribution).
- General expenses: Overhead costs like rent, utilities, and office supplies.
- Administrative expenses: Salaries of executives, accounting, legal, and IT services.
- Importance: SG&A is important for understanding the operational efficiency of a company. High SG&A relative to revenue might indicate inefficiencies, while low SG&A could suggest strong cost control.
In summary:
- COGS is about the costs directly tied to producing goods.
- SG&A encompasses all the other operating expenses necessary to run the business, excluding direct production costs.
Understanding these two helps in analyzing a company’s profitability and operational efficiency.
