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
- How To Find COGS Variable And Fixed Cost?
- Depreciation On IS Vs CF
- How Do You Get From EBITDA To Free Cash Flow?
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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.
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.
Believe there may be some conceptual error here. D&A almost always include D&A from the PPE as well as other line items included in cost.
Particular to your example, your D&A should not be 0 and should be whatever figure that is embedded into COGS
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.
In that case your ebitda would most certainly not be 15
Sorry, but would you mind clarifying your point?
Like one of the guys said up top, pull out D&A from COGS. Then work down and calculate your EBIT. Under the net income add another few lines for your EBITDA calc. EBIT(Operating Income) + D&A. EBIT will definitely be different from EBITDA.
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