I pay commissions to outside sales reps on products that they sell. Are the commissions that they are paid considered to be Cost of Goods sold or under operational expenses

I think it should be charged to Marketing & Selling Expense.

Bcoz C-G-S is made of Direct Material, Direct Labour and FOH only.

Well in my opinion it should be charged to Marketing & Selling Expense. I never face such situation. Am not quiet sure. Better wait for a expert.

moonfruit is mostly correct. If you're selling a product, "cost of goods sold" is only the cost of the goods, not the costs of selling the goods. This of course also implies that you're selling a product, which you said you are. So your cost of goods sold should only be the cost of the product itself.

Commissions would be under operating expenses. Operating expenses is one very broad category that includes nearly everything else. (It does not include cost of goods sold, nor certain items not directly related to your business like interest income, nor other special sorts of items. But nearly all your expenses will be under operating.)

Operating can then be split between Selling and Administrative.

The thing I disagree with moonfruit on is the part about cost of goods sold only being direct materials, labor and overhead. That is thinking from a manufacturing point of view. That's true if you're manufacturing the product. If you are a merchandiser and are buying the product to re-sell, then cost of goods sold is your cost to buy it, and all that stuff about direct material and such is not related.

Do keep in mind that if you're buying and re-selling, then you cost includes not just the price, but transportation you've paid, insurance, etc... anything it takes to get the product in, less any discounts or allowances you may receive. So be sure to include all that in there. (Commissions aren't part of your cost to get the inventory - it's a cost of selling it.)

Yap bro. I just take it as manufacturing concere

moonfruit is mostly correct. If you're selling a product, "cost of goods sold" is only the cost of the goods, not the costs of selling the goods. This of course also implies that you're selling a product, which you said you are. So your cost of goods sold should only be the cost of the product itself.

Commissions would be under operating expenses. Operating expenses is one very broad category that includes nearly everything else. (It does not include cost of goods sold, nor certain items not directly related to your business like interest income, nor other special sorts of items. But nearly all your expenses will be under operating.)

Operating can then be split between Selling and Administrative.

The thing I disagree with moonfruit on is the part about cost of goods sold only being direct materials, labor and overhead. That is thinking from a manufacturing point of view. That's true if you're manufacturing the product. If you are a merchandiser and are buying the product to re-sell, then cost of goods sold is your cost to buy it, and all that stuff about direct material and such is not related.

Do keep in mind that if you're buying and re-selling, then you cost includes not just the price, but transporation you've paid, insurance, etc... anything it takes to get the product in, less any discounts or allowances you may receive. So be sure to include all that in there. (Commissions aren't part of your cost to get the inventory - it's a cost of selling it.)

I have been told that because it is a variable expense i.e. the more they sell the product the more commission that is paid that is should be included in the cost. What is also confusing is COGS and COS being used for the same thing

If you're not subject to mandatory reporting guidelines (e.g. GAAP), then a lot ot times it comes down to the simple preference of the financials' audience (i.e. usually management, or the company's bankers).

I think that technically, COGS is intended to reflect the costs of acquiring, producing, and storing inventory (to the extent that these apply in a given situation). Under that viewpoint, e.g. freight IN is an inventory cost, whereas freight OUT is a selling cost--and hence not in COGS.

In practice, though, many companies use a more liberalized notion of COGS / COS, and include therein any costs that help them--in their opinion--to arrive at an intermediate profit amount they'll call "Gross Margin", or something like that, which they feel is meaningful from a biz management perspective.

For example, I've seen many medical practices set up their PnLs with a COS section for certain of their expenses, and a Gen & Admin section for the rest. Arguably, a medical practice doesn't have inventory costs, in a strict sense. Nevertheless, it seems these doctors find it illuminating to see certain of their operating expenses put into that COS bucket.

Point is, it often comes down to arranging your PnL accounts and groupings in whatever manner is most informative in understanding and analyzing your company's activities. Sounds like maybe the folks you're dealing with want an Inc Statement with the expenses divided between 'fixed' and 'variable' (a valuable way to look at things, frequently), and they're just calling the 'variable expenses' bucket "COS" for lack of a better term.

Just my two cents to add to the discussion.

I have been told that because it is a variable expense i.e. the more they sell the product the more commission that is paid that is should be included in the cost.

Who told you this? There isn't any relationship here. You can have variable and fixed COGS, variable and fixed selling, and variable and fixed admin.

It's more like two different points of view. It's like making a chart with variable and fixed as two columns across the top, and then putting COGS, selling & admin as three rows down the side. Do you want to look at the columns and split everything into variable and fixed? Or do you want to look at the rows and split everything into COGS, selling & admin? But to say something is COGS because it's variable just makes no sense to me. In other words, it's the reasoning behind it that bugs me.

I personally am having a hard time wrapping my brain around the idea of including selling costs in COGS, assuming it is actually a product that you are selling.


What is also confusing is COGS and COS being used for the same thing

Ah... now that's a different matter. And I almost brought it up in the first post, but thought I would be confusing things. :) They can be used for the same thing, but they may not be. I personally consider COGS to be very specifically for a product, and the costs directly related to that product. Versus the costs of selling the product. Cost of Sales is a nice catch-all kind of thing to call it, because some people mean the same thing as COGS, but it can also be used to include dang near anything someone wants to consider part of their cost of selling something, product or service. It's a very nice term for service companies. However... I still just can't get my head around that idea to count something because it's variable.

I think the answer to this depends on a few things. First is whether you were told by someone who is an authority over you to do it this way, or whether you get to make the decision. Also how picky you need or want to be. Or whether you'd like to do it a more "official, traditional" way and what you want is just opinions.

If you have no reason to follow certain rules and you think commissions are part of the cost of goods sold, then by all means go for it. But I'm looking at your original question of what commissions are "considered" to be, and I'd say they're considered to be selling expenses rather than COGS.

you, that's the part of Selling expense. Have confirmed it from my teache he is CMA. morgaine300 is right. There is no concept of variable and fixed cost in while preparing CGS.

The President of the company has told me he thinks it is part of COGS because when the reps sell the product they are paid on that sale. If they don't sell it they don't get paid. So it is part of the product cost.
Who told you this? There isn't any relationship here. You can have variable and fixed COGS, variable and fixed selling, and variable and fixed admin.

It's more like two different points of view. It's like making a chart with variable and fixed as two columns across the top, and then putting COGS, selling & admin as three rows down the side. Do you want to look at the columns and split everything into variable and fixed? Or do you want to look at the rows and split everything into COGS, selling & admin? But to say something is COGS because it's variable just makes no sense to me. In other words, it's the reasoning behind it that bugs me.

I personally am having a hard time wrapping my brain around the idea of including selling costs in COGS, assuming it is actually a product that you are selling.



Ah.... now that's a different matter. And I almost brought it up in the first post, but thought I would be confusing things. :) They can be used for the same thing, but they may not be. I personally consider COGS to be very specifically for a product, and the costs directly related to that product. Versus the costs of selling the product. Cost of Sales is a nice catch-all kind of thing to call it, because some people mean the same thing as COGS, but it can also be used to include dang near anything someone wants to consider part of their cost of selling something, product or service. It's a very nice term for service companies. However... I still just can't get my head around that idea to count something because it's variable.

I think the answer to this depends on a few things. First is whether you were told by someone who is an authority over you to do it this way, or whether you get to make the decision. Also how picky you need or want to be. Or whether you'd like to do it a more "official, traditional" way and what you want is just opinions.

If you have no reason to follow certain rules and you think commissions are part of the cost of goods sold, then by all means go for it. But I'm looking at your original question of what commissions are "considered" to be, and I'd say they're considered to be selling expenses rather than COGS.

We sell publications and products such as Prof Dev. Books to schools
The President of the company has told me he thinks it is part of COGS because when the reps sell the product they are paid on that sale. If they don't sell it they don't get paid. So it is part of the product cost.

The President of the company has told me he thinks it is part of COGS because when the reps sell the product they are paid on that sale. If they don't sell it they don't get paid. So it is part of the product cost.

I totally disagree. COGS stands for Cost of GOODS sold. Think of it in terms of process. You have the cost of purchasing and getting those goods. That's on the purchase side of things. Then you have costs involved in selling the goods, including those commissions, advertising, etc. That is selling activities. The fact that they don't get paid if nothing sells is completely irrelevant. I could more easily see the salary of the purchaser being included. (I wouldn't put it there, but I could at least make more sense of that.)

This might shed some light: I get students quite frequently think the COGS is the sales, and don't even get that it's an expense account. Because it has that word "sold" in it. But that's not the important word. The important word is "cost." The cost of what? Goods. Which goods? - the ones that were sold. But it's still the cost of the goods. The word "sold" in there is not implying that there's selling costs in there. It's just designating which goods. That designation is merely to separate unsold goods (inventory) from sold goods (COGS). But the cost part is the same - it's transferred from inventory to COGS after it's sold, at the same cost.

I assume this is a smaller company or you probably wouldn't be having this discussion with the president. There are different points of view, and for a small company it's not as important that you follow certain rules or even certain traditional methods. He might like having commissions in COGS, but I think his reasoning behind it is flawed. Maybe if he could come up with better reasoning, I might see his point.

What if you hired an advertising firm and they made an agreement that if your sales don't increase, you don't have to pay them. This would mean if sales increase, you pay, and if they don't increase, you don't pay. Does that reasoning now turn advertising into COGS?

Do a Google for "cost of goods sold definition." Unfortunately that does get a lot of hits for manufacturing rather than merchandising.

I repeat that you originally asked if it's "considered" to be COGS or operational. It's "considered to be" operational, which is made up of selling and admin expenses -- maybe he doesn't get that operating expenses does include selling expenses. If it were me, I'd want to know the cost of buying the stuff versus the cost of selling the stuff.

If the president insists on putting it under COGS and wants it that way, then he wants it that way. If you're going to do what he wants, then just do it. I'm not sure if you're trying to validate what he's saying... while what ArcSine said is valid, I just still don't agree with the reasoning behind the pres's point of view. If you want to know what's traditional, you already have that answer from like at least 3 of us. Or is the president arguing about it? :)