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Cost Of Goods Sold

What is Cost Of Goods Sold?

The Cost Of Goods Sold (COGS) is the measure of direct costs incurred by a company to manufacture or deliver their product or service. 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, Cost of Revenue

How to calculate Cost Of Goods Sold

ƒ Sum(Direct Labour Costs) + Sum(Other Direct Costs)

Example

A SAAS based Company A has the following costs that were incurred in a month: Amazon Web Services hosting costs: $30,000 Site Reliability Engineering Salaries: 45,000 Customer Support Salaries: $10,000 Consultant hired to work on infrastructure: $5,000 The total COGS for Company A this month is: $90,000

More about this metric

COGS is an important financial metric that measures operating efficiency and performance. COGS categorization is subject to the nature of the business. Even in the same industry, some expenses will be categorized as a COG but in other companies, they will be treated as operating expenses.

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 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. A favourable trend for COGS depends on the stage the product and organization is at. In general, COGS should become more efficient over time resulting in increased gross margins.

Additional Cost Of Goods Sold recommended resources

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

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