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Definition

What is COGS (Cost of Goods Sold)?

The direct costs of producing or delivering what you sell.

COGS includes every cost that scales directly with each unit sold — materials, manufacturing, freight-in, packaging, payment processing on some accounting treatments. It excludes fixed overhead like rent, salaries, and marketing. Getting COGS boundaries right is the prerequisite for every margin calculation: understate it and every "profitable" decision downstream inherits the error.

Formula

Gross Profit = Revenue − COGS

Example

A $60 product with $14 materials, $6 manufacturing, $4 inbound freight, and $3 packaging has $27 COGS and a 55% gross margin.

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Related terms

  • Gross Margin — Revenue minus cost of goods sold, expressed as a percentage of revenue.
  • Contribution Margin — Revenue minus variable costs — the amount each unit contributes toward fixed costs and profit.
  • Markup — Profit expressed as a percentage of cost — not the same as margin.