Hey future banker,

Welcome back to Finterview! We hope your recruiting is going well.

Let’s jump into today’s interview question.

What is included in COGS?

Let me break it down simply:

Think of COGS like the recipe cost for a restaurant. It includes all direct costs to make the dish - ingredients, cook's time, kitchen utilities - but not the host's salary or advertising costs.

For manufacturers, it's direct materials (like steel for cars), direct labor (factory workers' wages), and manufacturing overhead (factory electricity, equipment depreciation). Everything directly tied to making the product.

For retailers, it's simpler. COGS is basically what they paid for inventory plus shipping and handling. Think Target buying products wholesale before marking them up for customers.

Service companies? Trickier. A consulting firm's COGS might include consultant salaries and project-related travel. Software companies might include server costs and tech support.

Remember: COGS includes any cost that moves in direct proportion to sales. If you sell twice as much, these costs roughly double. That's why rent and executive salaries aren't COGS - they stay relatively fixed regardless of sales volume.

Talk soon,

Sam