COGS (Cost of Goods Sold)
COGS (Cost of Goods Sold) is the total direct cost of producing or purchasing the goods a business sells during a specific period. It includes materials, direct labor, and manufacturing overhead — but not indirect expenses like marketing or office rent.
COGS Definition
COGS (Cost of Goods Sold) is the total direct cost of producing or purchasing the goods a business sells during a specific period. It includes materials, direct labor, and manufacturing overhead — but not indirect expenses like marketing or office rent.
COGS in Practice
A coffee roaster buys green beans for $8/lb, spends $2/lb on roasting labor and packaging. Their COGS per pound of roasted coffee is $10. If they sell 10,000 lbs in a quarter at $18/lb, their revenue is $180,000 and COGS is $100,000, leaving $80,000 gross profit.
Why It Matters
COGS directly determines your gross profit margin — the most fundamental measure of business profitability. If COGS rises faster than revenue, your margins shrink even as sales grow. Tracking COGS helps you make pricing decisions, identify cost savings, and spot trends before they hurt your bottom line.
For tax purposes, COGS is deducted from revenue to determine gross profit. Accurate COGS tracking ensures you're not overpaying taxes and gives lenders and investors a clear picture of your unit economics.
FAQ
Q: What's included in COGS?
A: Direct materials, direct labor, and manufacturing/production overhead. It does not include selling expenses, administrative costs, or distribution costs.
Q: How is COGS calculated?
A: Beginning Inventory + Purchases During Period − Ending Inventory = COGS.
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