What is cost of goods sold?
COGS, also called cost of sales, includes only the costs directly tied to the goods sold. It excludes indirect costs such as marketing, office rent and admin salaries, which are [operating expenses](/glossary/operating-expenses).
Formula
COGS = Opening inventory + Purchases − Closing inventory
What's included
- Raw materials and stock purchased for resale
- Direct labour used to make products
- Freight-in and import duties
- Factory overheads allocated to production
For service businesses, the equivalent is "cost of services", such as contractor costs directly tied to client work.
Example
A shop starts the year with $12,000 of stock, buys $50,000 more and ends with $15,000 on hand. COGS = 12,000 + 50,000 − 15,000 = $47,000. If sales were $80,000, [gross profit](/glossary/gross-profit) is $33,000.
Inventory methods affect COGS
- FIFO (first in, first out): oldest costs are expensed first.
- [Weighted average cost](/glossary/weighted-average-cost): uses an average cost per unit.
- LIFO: newest costs expensed first; allowed under US GAAP but not IFRS.
Why it matters
COGS drives gross margin, pricing decisions and inventory planning, and it is usually a deductible business expense for tax.