Cost of Goods Sold

Cost of goods sold is the direct cost of producing the company's products or services. It includes materials, labor and manufacturing costs and is subtracted from revenue to calculate gross profit.

Components of COGS:

• Raw materials: Cost of inputs used in production
• Direct labour: Wages for workers directly involved in production
• Manufacturing overhead: Factory costs like utilities and equipment depreciation
• Freight-in: Shipping costs to receive materials

For service companies, cost of goods sold (sometimes called cost of revenue) includes:

• Labour costs: Salaries of service delivery staff
• Subcontractors: Third-party service providers
• Direct expenses: Costs directly tied to delivering services

Why COGS matters:

• Gross margin: Revenue minus COGS determines pricing power and efficiency
• Cost structure: Understanding the largest cost drivers
• Scalability: How COGS changes with volume affects profit potential
• Input cost exposure: Commodity price sensitivity

Analysis considerations:

• COGS as % of revenue: Trend over time shows efficiency changes
• Peer comparison: Compare to competitors to assess relative efficiency
• Inventory methods: FIFO vs. LIFO affects COGS during inflation