Dictionary / Financial statements
What Is Cost of Goods Sold?
Cost of goods sold, or COGS, is the direct cost of making or buying the products a company sold. It includes materials and factory labor, but not office costs or marketing.
What is included
- Raw materials and parts.
- Wages of the people who make the product.
- Factory costs tied directly to making it.
- For shops: what they paid suppliers for the goods.
What is not included
Office rent, head office staff, advertising, research and delivery to customers are usually running costs, not COGS. They come lower on the income statement.
Why it matters
Revenue minus COGS is gross profit. If COGS grows faster than sales, the gross margin shrinks. That can mean rising costs or price cuts.
COGS for service companies
Software and service companies have costs like servers and support staff instead of materials. Many call it cost of revenue. It works the same way.
See it in real companies
Open a company to see what it sells and how it makes money.
Related terms
Gross profitSales minus the direct cost of the product.
Gross marginGross profit as a percent of sales.
Income statementShows revenue, costs and profit.
Operating incomeProfit from the core business.
RevenueAll the money a company takes in from sales.
Economies of scaleGetting cheaper per unit as you get bigger.