Depreciation in COGS and EBITDA

I am working on the factory financial model. Therefore, depreciation costs of the Plant and Equipment are included in COGS, as these fixed assets are used in the direct production of the inventory.

My question is - as far as the company owns only assets that are used in production (and no other administrative buildings/equipment) and has no amortization costs, will EBITDA and EBIT of this company be the same? Or you can formulate this question the other way - while building Income Statement, should I include depreciation costs in COGS or after EBITDA (to arrive at EBIT)?

Thanks in advance.

Should I Include Depreciation in COGS or OPEX?

Depreciation expense can be included in different places depending on the asset that is being tied to the depreciation expense. Depreciation can be found in both COGS and OPEX on the income statement depending on the assets owned by the business. We explain in detail below.

To read more about depreciation check out our WSO finance dictionary or check out the video below.

Depreciation and Amortization in Operating Expense

In almost all scenarios, depreciation with amortization will be included in the operating expense section of the income statement. When the asset being depreciated is a fixed asset used for SG&A purposes, the depreciation will fall under operating expenses. Examples of fixed assets that would fall under this category include vans for sales people or an office fax system.

D&A in Cost of Goods Sold

Depreciation is listed under COGS if the fixed asset is directly involved with how the business generates revenue. IE for a retail company - the machine that makes the shirts may be depreciated under COGS or amusement park rides could be depreciated under COGS for a theme park company.

For another example, a manufacturing company would depreciate the manufacturing equipment and facilities under COGS and all other assets would be depreciated under operating expenses.

While less common, amortization can also be included in cost of goods sold / cost of services. This can be the case for companies such as rental companies or streaming companies.

For example, Netflix includes the amortization of its content assets and DVD assets within its cost of services line item (which is its cost of goods sold).

Source: Netflix Investor Relations

Read More About Depreciation and COGS on WSO

Preparing for Investment Banking Interviews?

The WSO investment banking interview course is designed by countless professionals with real world experience, tailored to people aspiring to break into the industry. This guide will help you learn how to answer these questions and many, many more.

Investment Banking Interview Course Here

WSO Elite Modeling Package

  • 6 courses to mastery: Excel, Financial Statement, LBO, M&A, Valuation and DCF
  • Elite instructors from top BB investment banks and private equity megafunds
  • Includes Company DB + Video Library Access (1 year)

Comments (13)

Sep 13, 2016 - 3:53am

EBIT and EBITDA cannot be the same if there is D&A. You don't need to build EBITDA into your income statement, just have an extra line in your model showing what EBITDA is after backing out D&A from wherever it is embedded.

Sep 13, 2016 - 4:18am

Thanks for your input. However, my main questions is the following:

Assume you that all the fixed assets you have is just an equipment that is used in direct production of the products.

Therefore, depreciation costs of the equipment should be included in COGS.

In case you have no other D&A Costs, Income Statement would look like that:

SALES: 100

COGS incl Depr: 80

GROSS Profit: 20

SG&A: 5

EBITDA: 15

D&A: 0

EBIT: 15

In this case, EBITDA and EBIT will be the same, as all the DEPR. costs are included in COGS.

Best Response
Sep 13, 2016 - 5:33am

In this example you provided:

SALES: 100

COGS incl Depr: 80

GROSS Profit: 20

SG&A: 5

EBITDA: 15

D&A: 0

EBIT: 15

You need to determine what the depreciation included in COGS is. Whether it is on a separate schedule or detailed on the IS doesn't matter. Let's say it is 8. EBITDA would be 23.

When a plumber from Hoboken tells you he has a good feeling about a reverse iron condor spread on the Japanese Yen, you really have no choice. If you don’t do it to him, somebody else surely will. -Eddie B.
  • 4
Learn More

300+ video lessons across 6 modeling courses taught by elite practitioners at the top investment banks and private equity funds -- Excel Modeling -- Financial Statement Modeling -- M&A Modeling -- LBO Modeling -- DCF and Valuation Modeling -- ALL INCLUDED + 2 Huge Bonuses.

Learn more
Sep 13, 2016 - 11:23am

Eveniet laudantium ut voluptates eos corrupti deleniti ad et. Non temporibus nulla soluta ea voluptatem.

Autem quaerat et itaque. Ex culpa voluptatem mollitia. Repellat harum blanditiis velit consequatur. Nemo beatae a est odio quia.

Start Discussion

Total Avg Compensation

November 2021 Investment Banking

  • Director/MD (10) $853
  • Vice President (40) $360
  • Associates (234) $234
  • 2nd Year Analyst (144) $156
  • 3rd+ Year Analyst (34) $154
  • Intern/Summer Associate (107) $146
  • 1st Year Analyst (513) $136
  • Intern/Summer Analyst (393) $83