Cost of Goods Sold
The direct costs of producing goods sold by a company, including materials and labor.
Cost of goods sold (COGS) captures the direct expenses attributable to producing the products a company sells, including raw materials, direct labor, and manufacturing supplies. COGS excludes indirect expenses like marketing, rent, and administrative salaries. It is subtracted from revenue on the income statement to calculate gross profit.
Formula
COGS = Beginning Inventory + Purchases − Ending InventoryExample
A candle maker sells $20,000 in candles—the wax, wicks, and jars cost $7,000 and direct labor $3,000, so COGS is $10,000, leaving $10,000 in gross profit.
Why It Matters for Your Business
COGS directly determines your gross profit margin—if you don't track it accurately, you won't know whether your pricing covers production costs.
Practical Tips
- •Track COGS by product line to identify which items have the best margins.
- •Negotiate bulk pricing with suppliers to reduce per-unit costs.
- •Review COGS monthly to catch cost creep before it erodes profitability.
Related Terms
More Accounting Terms
Accounts Payable
Money owed by a business to its suppliers or creditors for goods or services received but not yet paid for.
Accounts Receivable
Money owed to a business by its customers for goods or services delivered but not yet paid for.
Accrual Accounting
An accounting method that records revenues and expenses when they are incurred, regardless of when cash is exchanged.
Asset
Any resource owned by a business that has economic value and can provide future benefits.
Balance Sheet
A financial statement showing assets, liabilities, and equity at a specific point in time.
Related Financial Guides & Resources
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