MetricHQ Logo

Cost Of Goods Sold

What is Cost Of Goods Sold?

The Cost Of Goods Sold (COGS) is the measure of costs incurred by a company to manufacture or resell a product. Costs typically include raw material and direct labour, but this varies from business to business, depending on the products or services that are being sold. COGS is the building block to understanding Gross Margin and Gross Margin Percent.

Alternate names: Cost of Sales

How to calculate Cost Of Goods Sold

ƒ Sum(Raw Material Costs + Direct Labour Costs)

More about this metric

For software companies, Cost Of Goods Sold (COGS) can include, for example, hosting fees, third party licensing fees, credit card processing fees, customer onboarding fees, and support costs.

For a company with a physical product, COGS for a given time period is calculated by adding the inventory left over from the last period and any new purchases, then subtracting the inventory left over at the end of the period.

COGS is an important financial metric that helps the business and its investors and analysts track performance and understand the bottom line. It is tracked as a business expense and is subtracted from a company’s revenue to get Gross Margin. Typically companies try to reduce their COGS over time. This can often be done through economies of scale.

Additional Cost Of Goods Sold recommended resources

For a short read on how this applies to SaaS businesses, check out this Openview Labs post.

Metrics related to Cost Of Goods Sold