What Is COGS (Cost of Goods Sold)?
COGS (cost of goods sold) is the direct cost of producing or acquiring the goods a company sold during a period — mainly materials and direct labor. It's subtracted from revenue to calculate gross profit, making it a key driver of a company's margins.
What COGS is and why it matters
COGS captures only the costs directly tied to what was sold: raw materials, the labor to make the product, and freight-in. It excludes indirect costs like marketing, rent, and admin salaries, which are operating expenses. Because gross profit equals revenue minus COGS, controlling COGS directly protects margins — a small change in unit cost can move profitability significantly. It's also central to inventory accounting, since the method used to value inventory (FIFO, LIFO, weighted average) changes the COGS figure and therefore reported profit.
A worked example
A retailer starts the quarter with $40,000 in inventory, purchases $100,000 more during the quarter, and ends with $30,000 in inventory. COGS = beginning inventory + purchases − ending inventory = $40,000 + $100,000 − $30,000 = $110,000. If quarterly sales were $180,000, gross profit is $180,000 − $110,000 = $70,000, a gross margin of about 39%.
How firms handle it today
Firms calculate COGS from inventory records and purchase data at close, choosing and consistently applying an inventory valuation method so gross profit is stated correctly.
Related terms
- Gross margin
- Inventory
- Income statement
- Revenue
- Operating expenses
FAQ
What's included in COGS?
Direct costs of producing goods sold — materials, direct labor, and freight-in — but not indirect costs like marketing or admin.
What's the COGS formula?
Beginning inventory + purchases − ending inventory = cost of goods sold.
What's the difference between COGS and operating expenses?
COGS is directly tied to producing what was sold; operating expenses are the indirect costs of running the business.