What is COGS cost of goods sold

Manufacturing costs

Production costs are regulated in commercial law and serve as a benchmark for the valuation of assets (commercial law term) or economic goods (tax law term).

The legal definition can be found in Section 255 (2) of the German Commercial Code:

"Production costs are the expenses that arise through the consumption of goods and the use of services for the production of an asset, its expansion or for a significant improvement beyond its original condition.

This includes the material costs, the production costs and the special costs of production.

When calculating the production costs, appropriate parts of the necessary material overheads, the necessary production overheads and the depreciation of the fixed assets, insofar as this is caused by the production, may also be included.

General administration costs and expenses for company social facilities, voluntary social benefits and company pension schemes do not need to be included.

Expenses within the meaning of sentences 3 and 4 may only be taken into account insofar as they relate to the period of manufacture.

Distribution costs may not be included in the production costs. "

The manufacturing costs have no imputed costs and thus deviate from the economic definition of costs.

Manufacturing cost is what a product or service costs when you factor in the cost of all of the functions involved in creating the product for sale; thus also the costs of those organizational units in the production department to which structural costs (period costs) belong.

The term production costs describes the full "production costs", ie the costs for all functions in the production of the products to be sold externally. These are required for the creation of the full cost-based profitability analysis and possibly for the accounting (inventory valuation) (Cost of goods sold = full The proportional manufacturing costs, equivalent to product costs, are required to determine the contribution margin I.

Manufacturing costs is a term from the German Commercial Code (Section 255 Paragraph 2 HGB and Section 275 Paragraph 3 HGB). No imputed interest or risks may be included in the production costs, but appropriate shares for administrative costs. According to IAS and US-GAAP, inventories and Cost of Goods Sold COGS are to be valued at full production costs, but without including imputed interest. The manufacturing overhead approach per product unit makes it necessary to use a planned (normal) employment as a basis. Otherwise, the periodic structural costs / overheads are not to be calculated for the services provided to generate sales (plural).

The term comes from the accounting regulations according to § 255 HGB, according to which the valuation of the semi-finished and finished products as well as the self-made fixed assets must be carried out at the production costs. In addition to the individual costs, wear and tear (depreciation) and other impairments as well as appropriate parts of the operating and administrative costs can be included to a reasonable extent. This also means an option for the approach of product-related research costs. The “reasonable share” refers to the addition of these overheads for a normal level of employment. The lower limit of the production costs is therefore to be equated with the variable costs of the production area, while the permissible upper limit is to be seen with the variable costs increased by appropriate parts of the wear and tear, impairments and the operating and administrative costs. In the tax balance sheet, however, there is an obligation to capitalize the relevant fixed costs in the manufacturing cost area (Section 33 EStR, necessary overheads). The right to choose also applies to administrative overheads. In any case, there is a prohibition of capitalization for the distribution costs in the commercial and tax balance sheets. Likewise, no imputed additional costs may be capitalized.

According to Section 255 (2) of the German Commercial Code (HGB), production costs are the expenses incurred through the consumption of goods and the use of services for the production of an asset, its expansion or for a significant improvement beyond its original condition. This includes the material costs, the production costs and the special costs of production. When calculating the production costs, appropriate parts of the necessary material overheads, the necessary production overheads and the depreciation of the fixed assets, insofar as this is caused by the production, may also be included. General administrative costs and expenses for voluntary company social benefits do not need to be included. Schematically, the following applies to the determination of the production costs:

Direct material costs

+ Direct production costs

+ Special direct costs of production

+ Material overhead

+ Manufacturing overheads

+ Depreciation of fixed assets

+ General administration costs

+ Expenses for social institutions

+ Expenses for voluntary social benefits

+ Expenses for company pension schemes

+ Interest on borrowed capital


= Manufacturing costs

Distribution costs may not be included in production costs. In accordance with Section 255 (3) of the German Commercial Code, interest on borrowed capital is not included in production costs. Interest for borrowed capital that is used to finance the production of an asset may, however, be recognized if it relates to the period of production.

Completely or partially self-produced goods (unfinished products, systems and tools produced for the company's own operation, etc.) are to be valued at their production costs. These are much more difficult to determine than the acquisition costs, since the latter can generally be precisely determined on the basis of invoices issued when an asset is procured. Also the additional costs associated with the purchase such as transport and installation costs, notary fees, etc. are usually to be calculated exactly as expenses that lead to corresponding expenses. The production costs, on the other hand, are made up of a large number of types of costs that arise when creating an operating service. The production costs are calculated in the cost accounting. Due to the dependence of the tax balance on the trade balance, one would have to assume that the production costs are identical in both balance sheets. However, this is not the case for two reasons. First, expenses in the trade balance and business expenses in the tax balance do not match. Only those expenses that are recognized as deductible business expenses may be included in the tax balance sheet. But these are not all expenses that are included in the commercial manufacturing costs. So z. For example, higher depreciation rates can be offset in the commercial balance sheet than in the tax balance sheet, provisions can be set up that are not permitted for tax purposes, etc. E.g. for manufacturing and material overheads). The concept of production is associated with the idea of ​​a technical process. From an economic point of view, however, it corresponds not only to the concept of production in the sense of the actual manufacturing process, but also to the broader concept of production, i.e. H. it also includes the procurement, transport and storage of the cost goods required for production (production factors). The storage of finished products, on the other hand, is already part of the sales area. Production costs The separate disclosure of development, test and construction costs is not a difference in the composition, but only in the disclosure: these costs can also be counted among the special production costs. It is the basic principle of cost accounting that every operational service produced is charged for the costs that it actually caused in its production. Only part of these costs are direct costs, i. H. sol before costs that can be directly allocated to a cost unit (e.g. a specific service or a specific order). Such individual costs are e.g. B. the production wages, the production material and the special costs of production (design costs, license fees, models, special tools, etc.) or sales (agency commission, sales tax). However, a large part of the cost types cannot be allocated directly to the cost bearers, since these costs are incurred for several or all cost areas (cost centers) and several or all cost bearers and a breakdown is only possible with the help of key figures. These so-called overheads include B. Depreciation on capital goods, certain taxes, electricity, water, post and telephone charges, among others. If it is not easy to determine which components of the production costs must or may be capitalized in the balance sheet, the determination of the absolute amounts to be shown for each type of cost causes considerable difficulties for several reasons: (1) The distribution of overhead costs to cost centers and cost units in cost accounting is an extremely difficult problem that often cannot be solved by exact measurements but only by estimates. Not all components of the commercial production costs may be capitalized in the balance sheet, because otherwise there will be violations of the accounting regulations. So z. B. Imputed costs to the extent that they are not equivalent to expenses are not capitalized. Imputed costs are those types of costs that are included in the cost of production, but are not included in the profit and loss account, but are part of the balance sheet profit, e. B. Equity interest or company wages. If the goods were sold exactly at cost, that is to say without a profit mark-up, the entrepreneur would have to receive remuneration for his work and his capital employed in this case too; otherwise he would have suffered a loss of wealth equal to the amount that he would have achieved if he had borrowed his capital and earned a salary as an employed manager of another company. The principles of proper bookkeeping and accounting may require the capitalization of cost components that are not included in the cost accounting of the assets produced, such as z. This is the case, for example, when using partial cost accounting, in which only the variable overhead costs are allocated to the cost objects. Manufacturing costs include, in particular, general cost centers (e.g. energy supply, canteen), production aids (e.g. work preparation, repair department), material, administration and sales offices. General cost centers and production auxiliaries are usually treated as pre-cost centers. Their costs are offset against other cost centers via the internal cost allocation. On the other hand, material, administration and sales offices are generally understood as final cost locations, the costs of which are directly attributed to the cost bearers.

In addition to the acquisition costs, (balance sheet) represent a central category (primary valuation yardstick) of the valuation criteria with which goods manufactured and processed in the own company are to be recognized in the balance sheet. They include all expenses that arise from the consumption of goods and the use of services for the production of an asset, its expansion or significant improvement beyond its original condition (§255 Paragraph 2 HGB, Section 33 EStR). Their determination proves to be problematic in comparison to the acquisition costs insofar as there are predominantly no external documents (invoices), but parameters from the internal accounting system must be used. The starting point for determining the production costs on the balance sheet are the individual costs of the cost accounting, whereby the types of costs contained therein can only be recognized if they correspond to expenses recognized by commercial law. For their part, these expenses only determine the tax production costs to the extent that they are tax-deductible operating expenses. In principle, the expenses (direct costs) directly attributable to the product, such as production material, production wages and special direct production costs, are to be taken into account as components of the production costs in both the commercial and the tax balance sheet. Imputed cost components (e.g. equity interest or imputed rents), on the other hand, may not be included in the production costs. On the other hand, overhead costs that are not directly attributable are treated differently in the commercial and tax balance sheets. For the commercial balance sheet, the inclusion of overhead costs, with the exception of sales costs, for which there is a prohibition on recognition (Section 255 Paragraph 2 HGB), is at the discretion of the person making the balance sheet (Section 255 Paragraph 2 HGB). For the tax law manufacturing costs, however, there is no option to apply the fixed material overheads, part of the fixed production overheads and the special production overheads; rather, their calculation is mandatory (so-called necessary overheads according to Section 33 EStR). The different cost components as well as the upper and lower limits of the tax and commercial production costs are summarized in the figure.

Division calculations, surcharge calculations

(in cost center accounting), sum of direct and overhead material costs, direct and overhead manufacturing costs and, if applicable, special direct manufacturing costs. As part of the calculation, surcharge base for administration and sales overhead costs (see surcharge calculation, surcharge rates).

Previous technical term: Production effort | Next technical term: manufacturing cost principle

Report this article to the editors as incorrect & mark it for editing