What is the difference between COGS and SG&A? Give two examples of costs that belong in each for a manufacturing company.
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The answer
COGS captures the costs that are directly attributable to manufacturing the goods a company sells. SG&A covers the selling, general, and administrative expenses needed to run the business that aren't linked to individual units of production. For a manufacturing company, two costs that belong in COGS are the raw materials physically incorporated into the product and the direct labor of the workers on the production line.
Those expenses move with production volume, which is why gross margin tends to be relatively stable. On the SG&A side, two examples are the sales commissions earned by the company's reps and the fixed salaries of the corporate executive team. The fixed pieces of that base, like the executive salaries, are what create operating leverage as revenue grows.
Income statement
| Revenue | 1,000 |
| COGS | (600) |
| Gross profit | 400 |
| SG&A | (180) |
| EBITDA | 220 |
| D&A | (40) |
| EBIT | 180 |
| Interest expense | (20) |
| Pre-tax income | 160 |
| Taxes | (40) |
| Net income | 120 |
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