Glossary
Cost of Goods Sold (COGS)
The direct costs of producing the goods or services a company sold in a period, subtracted from revenue to get gross profit.
Cost of goods sold is the money a company spent to make or buy the products and services it actually sold during a period: raw materials, factory labor, freight in, and the share of production overhead tied to those units. It is the first expense on the Income statement, and subtracting it from Revenue gives Gross profit.
How it is calculated
For a business that holds stock to sell, COGS comes from the change in Inventory:
Software and service companies usually call the line "cost of revenue": hosting, support staff and licensing rather than materials.
What counts and what does not
COGS covers costs that rise with each unit produced. Marketing, head-office salaries and research are operating expenses below the gross-profit line. Where a company draws that line is partly a judgment call, which is one reason gross margins are best compared within an industry rather than across them.
Why investors watch it
Rising COGS as a share of revenue squeezes margins, and it often signals higher input prices, discounting or a shift toward lower-margin products. Inventory accounting also matters: under first-in, first-out (FIFO), older and usually cheaper inventory flows into COGS first, so in a period of rising prices FIFO reports lower COGS and higher profit than last-in, first-out (LIFO), which US GAAP permits but international standards do not.