COGS (Cost of Goods Sold)

COGS is the direct cost to produce the goods you sell, including materials, labor, and manufacturing overhead. It does not include indirect expenses like marketing, rent, or shipping to customers. You calculate it by adding the cost of inventory at the start of a period, plus purchases made during that period, minus leftover inventory at the end.

Why it matters

Understanding COGS tells you how much of each sale actually goes toward production, which determines your gross profit and whether your pricing strategy works. You need accurate COGS to set prices that cover expenses and generate real profit, and it's required for tax reporting and financial statements.

What COGS (Cost of Goods Sold) is not

COGS is not your total business expenses, it excludes overhead like office utilities, insurance, and advertising. It also doesn't include the cost of shipping products to customers, which is a separate operating expense.

Where this shows up

• Income statements and profit calculations
• Pricing decisions and margin analysis
• Tax returns and business accounting
• Inventory management and stock planning

Related terms

• Gross Profit calculated by subtracting COGS from revenue; shows profit before operating expenses
• Markup the percentage or dollar amount added to COGS to set your selling price
• Inventory the finished goods or raw materials counted when calculating COGS
• Operating Expenses indirect costs not included in COGS, like marketing and rent