Cost of goods sold (COGS) refers to the direct costs of producing the goods sold by a company.

COGS includes the cost of the materials and labor directly used to create the goods.

COGS excludes indirect expenses, such as distribution costs and sales force costs.

Do all businesses have Cost Of Goods Sold?

No! Many service companies do not have any cost of goods sold at all. COGS is defined as only the cost of inventory items sold during a given period. Not only do service companies have no goods to sell, but purely service companies also do not have inventories.

Operating Expenses vs. COGS

Unlike COGS, operating expenses (OPEX) are expenditures that are not directly tied to the production of goods or services.

What Does the COGS Tell You? Why does it matter?

Knowing a business’ COGS helps evaluate profitability.  The number that remains after you subtract COGS from your total revenue is known as your gross profit. The COGS is an important metric on the financial statements. The gross profit is a profitability measure that evaluates how efficient a company is in managing its labor and supplies in the production process. COGS fluctuates greatly depending on the quantity produced.

Let’s use the example of a farm that raises livestock and sells meat.

Costs of Good Sold

Operating Expenses