Cost of goods sold or COGS is the accumulated total of all business costs used to create any products or services which have been sold. An important metric on financial statements, when subtracted from gross profit, COGS helps measure a business’ profitability and evaluate efficiency. Depending on the type of business, these costs can include:
For Retail or Wholesale –
- Raw materials
- Factory overhead
A good cost of goods sold example is that of a smartphone manufacturer, who would include the material costs for the parts that go into making the phone plus the labor-associated costs to put the phone together. But the cost to send the phones to carrier locations and labor used to sell the phone would be excluded.
For Business Services –
- Salaries and benefits
- Payroll taxes
- Equipment related to providing professional services
- Hosting costs
For instance, the COGs of a software company would include the hosting costs required to deliver web services to customers, users, or subscribers. But the cost associated with cross-selling or upselling a different product or service to an existing customer would be excluded.
To calculate the cost of goods sold
The cost of goods should be clearly defined in order to remain consistent while reporting on crucial metrics like gross profit, though, there are no generally accepted accounting principles (GAAP) on the type of costs that are included. Businesses should apply logic that makes sense for their particular situation, but make sure to follow the rules outlined by the U.S. Securities and Exchange Commission (SEC) when it comes to keeping their books.