Because you remove COGS from sales revenue to calculate gross profit, it is important you know what to include in COGS. Your business's COGS includes all of the following:Raw materials costs
Direct labor costs
Shipping and handling costs
Storage costs
Overhead costs tied directly to production, such as the utilities required to keep machinery running
You should exclude expenses from COGS that are not directly related to production. Items to exclude from COGS include selling, general, and administrative (SG&A) expenses, depreciation, amortization, interest, and tax payments.In certain cases, you may include depreciation in COGS in a roundabout way. For example, if your business assigns depreciation expense on a piece of machinery to overhead costs that are directly linked to production, it may be included in COGS.