To calculate cost of goods sold, one would think that the costs to make it include everything from the materials and labor to the shipment, advertising and labor to resell the goods, right? Not exactly, because in my mind and for my bottom line that would include all of those things and more, including the building we used to keep it in until it sold and the insurance we have to pay on it, etc.
. However, in the real world of finance, to calculate cost of goods sold, the costs only include what are called direct costs which only include the cost of the materials and the labor for the time it took to make the product. The other costs are considered indirect costs and are used as business expenses, which mean that though those expenses are not considered part of the costs to make the product, it is considered an expense to the business itself. Huh? Ok, in simpler terms, the business expense is subtracted from your business income to calculate the net worth, (what your business is worth if sold) but not subtracted from the costs of goods which go into figuring your net income (the jingle that's in your pocket).
