COGS and OPEX values are recorded as separate items on the income statement. Operating expenses and the cost of goods sold are each subtracted from net sales to arrive at gross profit.
Profit Frog simplifies the process of calculating COGS, OPEX, and profitability. We are the leading FP&A software specifically designed for small businesses.
What is COGS?
Cost of goods sold, also known as COGS, is a term that many people have trouble understanding. The costs of goods sold also measures the direct cost insured in the production or services.
COGS stands for the accumulated cost of creating or obtaining products; they typically include raw material and direct labor.
Generally accepted accounting principles (GAAP), defines the cost of goods sold as the overall cost of producing the items sold during a selected period. Along with revenue, COGS will appear on the income statement.
COGS is the key component when calculating two business expenses: gross profit margin and gross profits. The gross profit is calculated by subtracting COGS from the revenue.
Inventory and COGS go hand in hand. For there to be a successful calculation of business COGS, carefully tracking inventory is key. Most companies perform periodic inventory audits, focusing on the beginning and end of the year to monitor it closely.
What is OPEX?
Operating expenses, commonly referred to as OPEX, are indirect expenses that are crucial to keeping a business running. Operating expenses can range from office supplies to some labor costs to rent and utilities.
Selling, administrative, and general (SG&A) expenses are put under the OPEX category as separate items.
Using Profit Frog’s profitability modeling software will simplify the tracking and budgeting of operating expenses. Getting a firm grip on OPEX helps reduce fear and uncertainty.
What is Included in COGS?
COGS includes all the costs of acquiring or manufacturing a physical product—or a nonphysical product such as software or electronic media. For instance, if a company sells physical products, COGS will include any direct cost of that product, including inventory, transportation costs, direct material costs, and other direct expenses.
Businesses who sell and manufacture products should have these six fixed and variable costs included in the cost of goods sold:
- Storage costs
- Transport costs
- Tools and parts used during the production
- Raw materials
- Factory labor
Even though inventory and accounts receivable are accounts the owner reports on the business’ balance sheet, some expenses on the income statement involve these items. COGS on the income statement represent the cost of the inventory a business sold during an accounting period.
What is Included in OPEX?
Operating expenses are those costs necessary to sustain day-to-day operations, but which are not directly related to delivering a service or producing a good.
The main goal for many companies is to maximize gross sales relative to OPEX. By doing so, OPEX will represent the core measurement of businesses’ efficiency.
The most common examples of operational expenses are:
- Business travel
- Property rates
- Wages and salaries
- Legal fees and accounting
- Interest paid on debt
- Administrative expenses
What is the COGS Formula?
The formula for calculating COGS is:
COGS=Beginning Inventory+P−Ending Inventory=Purchases during the period
COG= $30,000+ $9,000 -$5,000 = $34,000
The income statement contains all the inventory that is sold and it is all under the COGS account. The merchandise that didn’t get sold in the previous year is becoming the beginning inventory for your next year. If there are any extra productions or purchases made by the company, they will be added to the beginning inventory.
At the end of the year, all the products that were not sold will be subtracted from the sum of the beginning inventory as well as any additional purchases. When you get the final number, that number will be derived from the calculation and that will be your COGS.
COGS is also used in calculating the DPO (Days Payable Outstanding).
Days Payable Outstanding = (Average Accounts Payable / Cost of Goods Sold) * 365 Days
Everyday business owners don’t need to worry about the COGS formula when they use Profit Frog. Our intuitive software guides you to enter your different expenses and categorizes them appropriately.
With Profit Frog, you will have a full grasp on your company’s COGS and OPEX, and will be able to gain insights in where you can increase profit.
You can then forecast future scenarios by manipulating all of your business variables. This is known as scenario planning, and it helps you navigate uncertainty and steer your company toward success.
How Do You Calculate OPEX?
One of the main differences between COGS vs OPEX is how you calculate it, aside from the type of expenses they are. Having a clear understanding of how important operating expenses are is key to running your business successfully.
The formula depends on what expenses are incurred. For instance:
Operating Expense = Rent Expense + Salaries & Wages & Supplies Expense + Repairs & Maintenance Expense + Utilities Expense + Travel Expense + Insurance Expense
By using this formula, you will be able to calculate the operating cost for your business. Doing this will help you reduce operating expenses, therefore lower the overhead costs.
Operating expenses vs COGS calculations are difficult and confusing for the average owner of a small business. Profit Frog makes calculating COGS and OPEX easy and efficient.
COGS vs Operating Expenses in SaaS
Correct coding of SaaS COGS vs operating expenses is crucial for numerous reasons. Without correct expense coding between COGS and OPEX, you steer your SaaS toward maximum profitability. You’ll need to calculate the overall SaaS gross margin, and then calculate profit margins from that.
Ideally, a SaaS business should have a gross margin from 80 to 90% and a profit margin of 40-50%.
Profit Frog helps SaaS companies navigate uncertainty and maximize profitability with our profitability modeling software.
COGS vs OPEX FAQ
Is COGS an operating cost?
The difference between cost of goods sold and OPEX is that COGS directly relates to a specific product a business is selling—or a service a company is delivering. OPEX are costs incurred in day-to-day operations, regardless of whether any product is sold or not.
The cost of goods sold is an expense, which means it is not an operating cost.
Operating expenses and costs of goods sold are mutually exclusive. If an expense is COGS it is not OPEX, and vice versa.
Is COGS CapEx or OPEX?
CapEx, or capital expenditures, are major expenses incurred upfront to produce a future benefit to the business. An example might be a new fleet of vehicles, or new computers. OPEX, meanwhile, are day-to-day expenses that keep the business operational.
COGS is neither CapEx or OPEX, but are those expenses immediately related to producing a product or delivering a service.
When a purchase has been made, it reduces available operating income and needs to be classified either as a capital expenditure, a cost of goods sold, or an operating expense.
- If the purchase is rare or one-time, and brings some long-term benefit to the company, it’s probably CapEx
- If the expenses are regular and keep the lights on and the business operational, they are probably OPEX
- If the expenditure is directly related to producing revenue, it’s probably COGS
Does OPEX include fixed costs?
OPEX represents the indirect expenses incurred by a company to ensure smooth day-to-day operations. An indirect cost is usually OPEX ,as it is not directly identified with a particular product or service.
Even though they are not directly linked to the product or service revenues, OPEX is essential for running the core operations and does include fixed costs.
What is not included in COGS?
Direct expenses, also known as COGS, refers to any expenditures necessary for the production of goods or the delivery of services. The analysis of the cost of goods sold is crucial for evaluating how efficiently your business is managing the resources. What is not included in COGS are managerial expenses, advertising, utility expenses, etc.
Costs that are not directly linked to revenue generation are not included in COGS.
What is the difference between OPEX and SG&A?
SG&A (selling, general and administrative) expenses include all costs that are non-production. SG&A is often used as a synonym for OPEX, yet they are sometimes shown as separate line items on income statements.
Selling, general and administrative expenses are usually ones associated with the overall overhead as they can’t be directly traced to production. COGS, also sometimes termed cost of sales, does not include SG&A expenses, according to generally accepted accounting principles.
About Profit Frog
Profit Frog is the leading budgeting and forecasting software specifically designed to eliminate complexity for small businesses. Where other FP&A software solutions focus on complex forecasting of cash flows and other factors, Profit Frog strips forecasting down to the thing that matters most: profitability. Our profitability modeling solution allows you to quickly assess the health of your business, and look into the future to understand how all of your variables will affect future profitability as you adjust them. Armed with this knowledge, you can chart a path to maximum profit.