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Salaries in the Cost Of Goods Sold (COGS)

Kim Hall's Profile

accounting for salaries in the cost of goods soldHi There!  Maybe you saw the post that my client is moving to a new payroll system. 

I was talking to the vendor about account set up and he made a comment about salaries in the COGS that made me curious.

He said that some of his clients include salaries for sales people in the GOGS.

I was wondering how common that was? Is this a new trend?  I include the direct cost to produce goods for sale and sales seems indirect.  Am I missing something?

 

 

Answers

Topic Expert
Regis Quirin
Title: Director of Finance
Company: Gibney Anthony & Flaherty LLP
LinkedIn Profile
(Director of Finance, Gibney Anthony & Flaherty LLP) |

No. You are correct. Sales Salaries should not go into COGS; but labor to produce the product can go into COGS.

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

Don't forget overhead applications which includes manufacturing oversight (management) salaries...

Robert Honeyman
Title: CFO
Company: Advanced Predictive Analytics
(CFO, Advanced Predictive Analytics) |

Classifying sales compensation as COGS is not consistent with GAAP. In my mind, it makes no sense. Imagine if your company didn't produce product but acquired it from a third-party and resold it. There, the COGS is really clean: each sold product can be tied back to a single incoming SKU in your inventory. Now, it's true that your vendor's sales force cost (and G&A and profit margin) are all included in that figure, but not your internal sales force cost.

In an over-simplification (if you will...), your cost accounting system is really just a method designed to give you a simple value for the goods you're selling. The goal is as clean a measure of gross margin as you can get. If it turns out that buying finished inventory is cheaper than manufacturing it yourself, surely you'd try to figure out a way to either lower your production costs or outsource your product. But if you include selling costs in COGS, your analysis will be far less clear or easy.

So, whoever the sales guy was, he was overselling his product. You're not missing anything.

Kim Hall
Title: Consultant
Company: HWG, Inc.
(Consultant, HWG, Inc.) |

Perfect! I agree, not GAAP. Bad info. And that is why we should never just take the vendors word for something ... I hope he doesn't tell someone else that who doesn't know different. I will circle back around with him on this.

Topic Expert
Patrick Dunne
Title: Chief Financial Officer
Company: Milk Source
(Chief Financial Officer, Milk Source) |

Absolutely not. Sales costs should never go into COGS. You will often have some administration costs that often require some analysis, but sales is always a "black or white" classification.

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