Cost of goods sold (COGS)

What is cost of goods sold (cogs)?

Cost of goods sold (COGS) is the direct cost of producing and delivering what you sell, raw materials, direct labor, payment processing, hosting for a software product. It sits right below revenue on the income statement and gets subtracted to reach gross profit. COGS scales with volume: sell more, and it rises with you.

Formula

Worked example

Why it matters for fast-growing companies

COGS defines your gross margin, which caps how much every sale contributes toward overhead and profit. Misclassifying costs, burying delivery in operating expenses, or the reverse, inflates or deflates margin and misleads pricing. For fast-growing companies, clean COGS is often the difference between scaling profitably and scaling your losses.

Related terms

• Unit economicsGross profitGross profit is what's left from revenue after subtracting the direct cost of delivering your product or service (COGS).
• Unit economicsGross marginGross margin is the share of revenue left after the direct cost of delivering your product, shown as a percentage.
• Accounting & closeOperating expenses (OpEx)Operating expenses are the costs of running your business that aren't tied directly to producing what you sell, salaries, rent, marketing, software, and admin.
• Unit economicsContribution marginContribution margin is what's left from a sale after subtracting the variable costs of delivering it, the amount each sale contributes toward covering fixed costs and then profit.

Frequently asked questions