What's the Difference Between COGS (Cost of Goods Sold) and Operating Expenses?
COGS (Cost of Goods Sold) only includes costs that are directly related to the creation of your sold product, while operating expenses refer to all indirect costs associated with running your business.
Example of COGS vs Operating Expenses
COGS (Cost of Goods Sold) Example
You own a t-shirt manufacturing company and you purchase more cotton to be used in the production of more t-shirts to sell. This is an example of a COGS expense.
Operating Expense (OPEX) Example
You own a t-shirt manufacturing company and you must pay for general liability insurance. The cost of your insurance is an example of an operating expense.
COGS vs. Operating Expenses: Main Difference
The main difference between COGS (Cost of Goods Sold) and operating expenses is this: COGS are business expenses that are directly tied to the production of your goods or services while operating expenses are not directly tied to revenue production.
Common COGS expenses include:
- raw materials
- direct labor
- freight-in costs
- storage costs
Common operating expenses include:
- rent
- insurance
- property taxes
- interest paid on debt
COGS vs. Operating Expenses: Common Questions
1) Are COGS and operating expenses the same?
No, COGS and operating expenses are not the same. COGS includes all costs associated with producing your product or service, while operating expenses include all other necessary costs of running your business.
2) What expenses should be included in COGS?
Some examples of COGS expenses are raw materials, items purchased for resale, purchase returns and allowances, cash discounts, parts used in production, along with many others.
3) Is COGS considered an operating expense?
COGS and operating expenses appear as two different line items on the income statement.
Cost of Goods Sold (COGS) vs. Operating Expenses: Conclusion
If you are ever confused about the difference between your cost of goods sold and your operating expenses, just remember that COGS are costs associated with producing your goods or services while operating expenses include all other indirect costs of running your business such as rent, utilities, and insurance.
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