Cost of goods sold (COGS)
Also called cost of sales
Reviewed by Dasha ShakovVP Marketing, Proton
Updated
What is cost of goods sold (COGS)?
Cost of goods sold (COGS) is the cost of the products a company sold during a period. For a distributor, COGS is mainly what it paid suppliers for the goods it resold, adjusted for inbound freight and supplier rebates according to its accounting policies.
How it works
For a manufacturer, COGS includes the direct costs of making the product, such as materials and factory labor. In both cases it leaves out selling and administrative costs, such as sales salaries, marketing and office rent, which are operating expenses.
Cost of goods sold (COGS) example
A distributor sold $10 million of products last year that had cost it $7.5 million. Its COGS is $7.5 million and its gross profit $2.5 million.
Related terms
- Gross marginGross margin is the share of sales a distributor keeps after paying for the goods it sold: gross margin % = (revenue − COGS) ÷ revenue.
- Landed costLanded cost is the total cost of getting a product onto the shelf: its purchase price plus inbound freight, duties and tariffs, insurance and handling.
- First in, first out (FIFO)First in, first out (FIFO) is an inventory method that assumes the oldest stock is sold first.
- Last in, first out (LIFO)Last in, first out (LIFO) is an inventory accounting method that assumes the newest stock is sold first, so cost of goods sold reflects the latest costs.
- Inventory turnsInventory turns is the number of times a distributor sells through its average inventory in a year: annual COGS ÷ average inventory at cost.
