Cost of Goods Sold (COGS) represents the direct costs required to produce or deliver a company’s goods or services. Examples include materials, direct labor, manufacturing overhead, freight-in, and for software, hosting costs that scale with usage.
Formula
COGS is typically calculated as: Beginning Inventory + Purchases − Ending Inventory (for physical goods). For services or software, it aggregates direct delivery costs for the period.
Example
A retailer starts the quarter with $200 of inventory, purchases $800, and ends with $150. COGS = $200 + $800 − $150 = $850.
Why it matters
COGS is central to measuring product-level profitability. Lowering COGS—via sourcing, process efficiency, or design—improves gross profit and gross margin.
