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What are the main components that make up the cost of goods sold?
Direct materials - The raw materials and components that are directly used in the production of the final product make up a significant portion of COGS.
Direct labor - The wages and salaries of the workers who are directly involved in manufacturing the product are included in COGS.
Overhead costs - Factory overhead expenses like utilities, rent, insurance, and maintenance related to production are all factored into COGS.
Freight and shipping - The costs to transport raw materials and finished goods are considered part of COGS.
Inventory changes - As inventory levels fluctuate, the costs of goods that were previously in ending inventory get added to COGS when sold.
Discounts and allowances - Any discounts or allowances received on purchases of materials are deducted from COGS.
Damaged and obsolete inventory - The costs of inventory that becomes damaged or obsolete are often written off and included in COGS.
Production variances - Any variances between actual and standard production costs get folded into COGS.
Depreciation - The depreciation of equipment and facilities used in production is accounted for in COGS.
Lease/rental costs - Rental or lease payments for production equipment and facilities are factored into COGS.
Supplies and consumables - The costs of supplies and consumable items used in production are considered part of COGS.
Quality control - Expenses related to quality control and testing of products are included in COGS.
Royalties and licenses - Any royalties or license fees paid for production-related intellectual property get added to COGS.
Packaging and labeling - The costs of packaging materials and labeling for finished goods are incorporated into COGS.
Inventory shrinkage - Losses due to theft, spoilage, or other shrinkage in inventory levels are accounted for in COGS.
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