Cost of Goods Sold

Cost of goods sold, often called COGS, captures what it cost to produce or buy the items that were actually sold. It appears on the income statement just below revenue, and subtracting it from revenue gives gross profit.

For a retailer, COGS is mainly the purchase price of the goods sold. For a manufacturer, it includes raw materials, the wages of production workers and factory costs. It does not include general costs like head office salaries, marketing or rent for offices, which are recorded as operating expenses.

COGS is often calculated using inventory figures: opening inventory plus purchases during the period, minus closing inventory. If a shop starts the year with 30,000 of stock, buys 120,000 more and ends with 25,000, its COGS is 125,000.

Because COGS directly affects gross profit, changes in material prices, wages or production efficiency show up quickly in a company's margins. The inventory valuation method used, such as FIFO or weighted average, can also affect the figure.

Note: Cost of sales is a closely related term often used under IFRS. For most businesses it means the same as cost of goods sold, though for service companies it can include the direct cost of providing services.