![]() This may indicate a loss in the goods sold, production inefficiencies, or potential accounting errors. While theoretically possible, it’s highly unusual for COGS to be higher than revenue. In land investing, COGS would cover direct land-related costs, while Cost of Sales might include marketing or brokerage fees. Service industries may also use cost of sales as a “stand-in” for cost of goods sold, which are generally favored by manufacturers. COGS typically refers to the direct costs of producing or purchasing goods a company sells, whereas Cost of Sales may include indirect costs such as distribution and sales expenses. While COGS and Cost of Sales are often used interchangeably, there can be subtle differences. What’s the Difference Between COGS and Cost of Sales? Technology Services: Many companies like IBM often offshore software development, allowing access to global talent at competitive rates.Apparel Industry: Brands like Nike strategically outsource production to countries with lower labor costs to optimize COGS.Food Industry: Restaurants like Chipotle utilize local sourcing to reduce transportation costs and ensure fresh ingredients.Technology: Tech companies like Apple source components from various global suppliers to negotiate better pricing and reduce dependency on a single vendor.Strategic Sourcing and Supply Chain Management Service Industry: Automating customer service through AI chatbots can decrease labor expenses related to customer support.Real Estate: Green building practices like installing energy-efficient HVAC systems can lower ongoing maintenance and utility costs.Retail: Private-label products enable retailers like Target to offer quality goods at lower prices by controlling material and production costs.Construction: Alternative and/or sustainable materials can lower construction costs without compromising quality.An example is General Motors securing a supply of raw materials for electric vehicle batteries. Manufacturing: A manufacturing company may negotiate bulk purchase discounts with suppliers, reducing raw material costs.For example, the city of Baltimore’s Enterprise Zone Program offers property and income tax credits to encourage development in targeted regions. Real estate development: Developers may obtain tax incentives for developing underutilized areas.Here are some examples of real-world applications of COGS optimization. However, businesses approach this differently based on their industry. Optimizing the cost of goods sold is an essential business strategy to maximize income from regular operations. For instance, when calculating COGS, a real estate investment trust (REIT) must comply with specific IRS guidelines related to depreciation and interest expenses. Other businesses include law firms, business consultants, accountants, and so on.Ĭompanies can optimize their tax positions by carefully aligning COGS calculations with IRS regulations. These include appraisal companies in real estate. Note that some industries cannot use COGS for tax reporting, particularly service industries (since they have no inventory to speak of). Partnerships and LLCs with two or more members: Line 2 of Form 1065.In addition, different types of business entities may also need to include COGS calculations on their respective tax forms: ![]() Total purchases, labor costs, and other expenses.Ending inventory (at the end of the year).Starting inventory (inventory at the beginning of the year). ![]() However, sole proprietors and single-member limited liability companies must accomplish COGS on their Schedule C. Generally, businesses that keep inventory need to fill out IRS Form 1125-A if they keep an inventory.
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