Most arguments are about disagreements on definitions. In the case of most accounting terms, definitions have been agreed at national or international levels (like IFRS), and it is important to understand them well.
As per IAS 1, in the Statement of Profit and Loss Statement the expenses can be analysed by function of the business or by nature of the expense. If done by function, then making the goods or services that are sold or generating yield is one function (usually these expenses are called Cost of Goods Sold or COGS); the act of selling the goods or services is another function; the administrative tasks are part of another function, etc.
As sales commissions are compensation for the act of selling the goods or services, then sales commissions are NOT included in COGS. The sales commissions are included in the selling expenses, usually presented as part of the Operating Costs or SGA expenses.
The confusion arises because the sales commissions are often calculated based on sales or revenue generated, but they are not expenses directly related to the function of making the goods or services that yield revenue.
What goes into the COGS?
As per IAS 18 Revenue, when revenue is recognised (due to a sale of goods, the rendering of services or the yield-generating use of entity assets by a third-party), the carrying amount of those inventories sold is recognised as an expense, often called "Cost of Goods Sold".
Cost of Goods Sold (COGS) is therefore defined as Inventory at the Beginning of Period + Purchases in the Period – Inventory at the End of Period.
The measurement of the inventory is key and defined in IAS 2 Inventories as "the lower of cost and net realisable value". IAS 2.10 reads: "The cost of inventories shall comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition."
Finally, IAS 2.16(d) indicates that inventory costs exclude selling costs, and that these selling costs are recognised as expenses in the period in which they are incurred. *This settles the matter.*
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Do you include sales commissions as part of your cost of goods sold? A subject of much debate amongst experts, what do you think makes most sense? Let us know in the comments! (or 'like' the answer that you agree most with below)
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