![]() ![]() You can achieve that by reducing supplier costs or increasing the efficiency of your direct labor through different tools and training. This implies that to increase and maintain profitability you have to keep your production costs low. A low cost of goods sold indicates that you have created the product with utmost efficiency, and that results in higher gross profits. Each is a performance metric for your business in the respective quarter and allows you to make informed business decisions.ĬOGS indicates the operational efficiency of your production, or even the lack thereof. Knowing the difference between COGS and Operating Expenses will help you strategize the growth of your business. What are some of the implications of COGS and Operating Expenses? Profitability When an operating expense is incurred, such as rent or insurance, the appropriate expense account, such as rent or utilities would be debited, and accounts payable would be credited.įor the cost of goods sold, your bookkeeper would debit the appropriate asset account and credit accounts payable.Īs the inventory is sold, it becomes an expense, so your bookkeeper would credit the asset account and debit the related COGS account for the same amount. There is also a difference between operating expenses and COGS in the way they’re reflected in your books of accounts.
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