cost of goods sold
The direct costs attributable to the production of goods sold by a company, including materials and direct labor — the largest expense on a manufacturer's income statement.
Example
“COGS of $6M on $10M in revenue produced a 40% gross margin — each product cost $0.60 to make and sold for $1.00.”
Memory Tip
COGS = what it COST to make what you SOLD. Revenue minus COGS = gross profit.
Why It Matters
Understanding cost of goods sold helps you evaluate whether a company is operating efficiently and managing its production expenses well. When you are investing in stocks or considering buying from a company, lower COGS relative to sales generally means better profitability and a stronger business model.
Common Misconception
Many people think cost of goods sold includes all business expenses, but it actually only covers direct production costs. Operating expenses like marketing, salaries for office staff, and administrative costs are not included in COGS and appear separately on the income statement.
In Practice
A clothing manufacturer might have total revenue of 1 million dollars in a year. If their COGS is 400,000 dollars (covering fabric, thread, and factory worker wages), their gross profit is 600,000 dollars. The remaining expenses like shipping, marketing, and office rent would be deducted from this gross profit to find net income.
Etymology
COST (expense) OF GOODS (products manufactured) SOLD (revenue-generating). The COST to produce the specific GOODS that were SOLD.
Common Misspellings
Small business accounting made simple
Related Terms
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See Also
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