COGS (Cost of Goods Sold)

Cost of Goods Sold (COGS) represents the direct costs of producing or purchasing the goods a company sells during a specific period, including materials, labor, and manufacturing overhead.

What Is COGS?

COGS measures the direct costs tied to producing or acquiring the products you sell. It appears on the income statement and is subtracted from revenue to calculate gross profit.

What's Included in COGS

Raw materials used in production

Direct labor (workers who make the product)

Manufacturing overhead (factory rent, equipment depreciation)

Freight-in (shipping costs to receive inventory)

Purchased goods (for resellers — what you paid for inventory)

What's NOT in COGS

Sales and marketing expenses

Office rent and utilities

Administrative salaries

Distribution/shipping to customers

COGS Formula

COGS = Beginning Inventory + Purchases - Ending Inventory

Why COGS Matters

1. Gross margin: Revenue - COGS = Gross Profit. A healthy gross margin means your pricing covers production costs.

2. Tax deductions: COGS is deducted from revenue before calculating taxable income.

3. Pricing decisions: If COGS rises, you may need to raise prices.

4. Investor metrics: Gross margin trends signal business health.

COGS in QuickBooks

In QBO, COGS accounts sit in the "Cost of Goods Sold" section of your Chart of Accounts. Common sub-accounts: Materials, Direct Labor, Shipping/Freight, Subcontractors.

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