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SG&A vs COGS – Difference between Them
COGS are direct production costs, while SG&A are indirect operational costs. COGS formula includes inventory, SG&A focuses on expenses. Both impact business finances and should be managed carefully for success.
Published on 23 Aug 2023
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Running a business involves more than just selling products or services. There are many hidden costs that business owners must be aware of to ensure financial success. Two important terms to understand are the cost of goods sold (COGS) and selling, general, and administrative expenses (SG&A). By understanding the difference between COGS and SG&A, you can better manage your business finances and make informed decisions. In this article, we will explore the definitions, formulas, and differences between COGS and SG&A, as well as answer frequently asked questions about these expenses.
Understanding the cost of goods sold (COGS)
The cost of goods sold refers to the direct costs associated with producing or purchasing the products or services that a business sells. This includes the cost of raw materials, direct labor, and any manufacturing or production costs. Calculating the COGS is essential for determining the profitability of a business and understanding its financial health.
To calculate the COGS, you can use the following formula:
COGS = Opening Inventory + Purchases – Closing Inventory
It is important to note that the COGS only includes costs directly related to the production or purchase of goods. It does not include selling, general, and administrative expenses, which we will discuss in the next section.
What is SG&A?
Selling, general, and administrative expenses are the indirect costs associated with running a business. These expenses are not directly tied to the production or purchase of goods, but they are necessary for the day-to-day operations of the business. SG&A expenses include salaries, rent, utilities, marketing expenses, legal fees, and other administrative costs.
While COGS focuses on the direct costs of production, SG&A encompasses the costs needed to support the production and sale of goods. These expenses are crucial for the smooth functioning of a business, but they do not directly contribute to the creation of the products or services being sold.
What’s included in COGS and SG&A?
COGS includes the costs directly associated with producing or purchasing goods. This includes the cost of raw materials, direct labor, and any manufacturing or production costs. It does not include any selling, general, and administrative expenses.
On the other hand, SG&A includes all the indirect costs of running a business. This includes salaries, rent, utilities, marketing expenses, legal fees, and other administrative costs. SG&A does not include any direct costs related to the production or purchase of goods.
COGS formula vs SG&A formula
The formulas for calculating COGS and SG&A are different due to the nature of the expenses they represent.
To calculate COGS, you can use the following formula:
COGS = Opening Inventory + Purchases – Closing Inventory
This formula takes into account the inventory at the beginning and end of a specific period, as well as the purchases made during that period. By subtracting the closing inventory from the sum of the opening inventory and purchases, you can determine the cost of goods sold during that period.
On the other hand, calculating SG&A does not involve inventory. Instead, you need to add up all the selling, general, and administrative expenses incurred during a specific period. This can be done by reviewing financial statements, expense reports, and other relevant documents.
The difference between SG&A vs COGS
The main difference between SG&A and COGS lies in the types of expenses they encompass.
- COGS includes the direct costs associated with producing or purchasing goods, such as raw materials and direct labor. SG&A, on the other hand, includes the indirect costs of running a business, such as salaries, rent, utilities, and marketing expenses.
- Another important distinction is that COGS directly contributes to the creation of the products or services being sold, while SG&A supports the production and sale of goods. In other words, COGS is directly tied to revenue generation, while SG&A is necessary for the overall functioning of the business.
Are SG&A expenses tax deductible?
Yes, SG&A expenses are generally tax deductible. These expenses are considered necessary for the operation of a business and can be deducted from the business’s taxable income. However, it is important to consult with a tax professional or accountant to ensure compliance with tax regulations and to accurately calculate deductible expenses.
Understanding the difference between SG&A vs COGS is essential for managing the hidden costs of running a business. COGS represents the direct costs associated with producing or purchasing goods, while SG&A encompasses the indirect costs of running a business. By carefully tracking and analyzing these expenses, business owners can make informed financial decisions and ensure the long-term success of their ventures.
Remember, COGS directly contributes to revenue generation, while SG&A supports the overall functioning of the business. Both types of expenses are essential, but it is important to distinguish between them and allocate resources accordingly. By doing so, you can effectively manage the hidden costs of running a business and optimize your financial performance.
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