Cost of Goods Sold

Cost of Goods Sold (COGS)

The Cost of Goods Sold (COGS) refers to the direct costs attributable to the production of the goods sold by a company. This includes the cost of materials and labor directly used to create the product, as well as any other direct expenses involved in the manufacturing process. COGS does not include indirect expenses such as sales force costs or distribution costs.

Examples

• A bakery incurs costs for flour, sugar, and labor to bake bread. The total of these expenses represents the COGS for the bread sold.
• A furniture manufacturer calculates COGS by adding the costs of wood, fabric, and wages for workers who assemble the furniture.

Cases

In a retail setting, COGS includes the purchase price of the Inventory sold during a period. For example, if a clothing retailer purchases shirts for $10 each and sells 100 shirts, the COGS would be $1,000.

In contrast, a software company may have a minimal COGS since its products do not require physical materials, though it may include direct costs like hosting and software development specifically tied to product sales.