There are a few different ways to categorize the cost of goods sold (COGS), and it ultimately depends on how your business keeps track of expenses. For some businesses, COGS may be lumped into a single category like "production costs" or "inventory costs". Other businesses may have more detailed categories like "raw materials", "labor", and "overhead".
If your business uses accounting software, there is usually a default COGS account that is set up. This account is typically used to track the direct costs associated with producing your goods or services. These costs can include:
- Raw materials
- Direct labor
- Manufacturing overhead
COGS does not include indirect expenses like marketing, administrative, or research and development costs. These costs are considered part of the operating expenses of your business.
When you're ready to file your taxes, you'll report your COGS on Schedule C of your Form 1040. This will give you your gross profit, which is your total revenue minus your COGS. Your gross profit is an important number because it shows how much money you have left to cover your operating expenses and still make a profit.