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What Is COGS?
Cost of Goods Sold (COGS) is the direct cost of producing the goods a business sold during a period.
What's Included in COGS?
Included: - Raw materials and components - Direct labor (for manufacturing) - Manufacturing overhead (factory costs directly tied to production) - Freight-in (shipping to receive inventory)
Not included (operating expenses): - Sales and marketing costs - Administrative salaries - R&D expenses - Interest and taxes
COGS and Gross Margin
Gross margin is the primary indicator of pricing power and business model efficiency. Compare across time periods and competitors within the same industry.
COGS for Service Businesses
Service businesses don't have physical inventory but still have COGS — it's called Cost of Revenue (CoR) or Cost of Service. Includes direct labor hours billed to clients, contractor costs, and hosting/infrastructure for SaaS.