Cost of goods sold.
aka COGS, cost of sales, direct costs
What it actually cost to make or buy the things you sold.
What it actually means
Cost of goods sold, or COGS, is the direct cost of producing or buying the products a business sold in a period. It includes materials, the stock bought for resale and often the labour that makes the product. It is subtracted from revenue to calculate gross profit on the income statement.
Picture a small bakery. In one month it sells 20,000 of bread and cakes. The flour, butter, sugar and packaging used for those items cost 6,000, and the bakers who made them were paid 4,000. Its cost of goods sold is roughly 10,000, so gross profit is 10,000. Rent, marketing and the owner's accountant are not part of COGS. They are operating expenses, because the bakery would pay them even if it baked a little less. COGS moves with sales: sell more cakes, use more butter.
The nuance is the word "sold". COGS only counts the cost of items that actually left the shop in that period, not everything the business bought. If the bakery buys 9,000 of flour but uses only 6,000, the rest stays on the balance sheet as inventory until it is used. This is why inventory counts and valuation methods matter so much for product businesses. Service companies often use "cost of sales" or "cost of revenue" instead, covering things like the staff time or hosting needed to deliver the service.
Where you'll hear it
Our COGS jumped to 42% of revenue after the new packaging. Either we raise prices or we find a cheaper bottle supplier.
Translation: making each product now eats a much bigger share of what customers pay, so the brand must charge more or cut production costs.
Also in income statements, in pricing and margin discussions, in investor updates for ecommerce and retail brands, in inventory audits, and in tax returns, where many countries let businesses deduct cost of goods sold from taxable income. Retail and ecommerce teams often watch COGS weekly, because shipping rates and supplier prices can change quickly.
The pop-culture version
You sell 100 cups of lemonade at 3 each and take home 300. To make those cups, you used lemons, sugar, ice and paper cups that cost you 90 in total.
That 90 is your cost of goods sold. It only covers what went into the drinks you actually sold. The table you bought and the sign you painted are separate costs.
The 210 left over is your gross profit. If lemons double in price next weekend, your COGS rises, and every cup earns you less unless you raise the price.
The practical rule: know your cost of goods sold per unit before you set a price. If you do not know what each product really costs to make, you cannot know if a sale is worth it. Recheck it whenever a supplier, a shipping rate or a recipe changes, because small increases add up across thousands of sales.
Say it like you mean it
“Our cost of goods sold is 18 per unit, so at a 45 price each sale leaves 27 before overhead.”
It shows the direct cost per unit and what is left to cover other expenses.“Our cost of goods sold includes the office rent and the marketing budget.”
Rent and marketing are operating expenses; COGS covers only the direct cost of products sold.You will also hear "landed cost", the full cost of a product including shipping and import duties, and "COGS creep", when small increases in materials or freight slowly eat into margins. Both matter whenever suppliers raise prices. Finance teams also compare COGS as a percentage of revenue over time to spot when costs are rising faster than prices.
A step by step guide to preparing a corporate income statement, from revenue and cost of goods sold down to net income.
Decoded next
Decoded by the Kurums editorial team. Kurums Decoded translates the language of business for people who are new to it. Definitions are kept short on purpose; the serious version above goes deep. Nothing here is financial, legal or career advice.
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