COGS includes all direct costs needed to produce a product for sale.Understanding and managing COGS helps leaders run their companies more efficiently and more profitably.So, COGS is an important concept to grasp.ĬOGS, sometimes called “cost of sales,” is reported on a company’s income statement, right beneath the revenue line. The higher a company’s COGS, the lower its gross profit. Gross profit is obtained by subtracting COGS from revenue, while gross margin is gross profit divided by revenue. Most importantly, COGS is a key component of determining two critical business metrics: a company’s gross profit and its gross margin. That definition provides guidelines for which costs to include and an associated formula for calculating COGS. Generally Accepted Accounting Principles (GAAP) that requires product companies to apply inventory costing principles. If revenue represents the total sales of a company’s products and services, then COGS is the accumulated cost of creating or acquiring those products.ĬOGS is an accounting term with a specific definition under U.S. Understanding COGS, and managing its components, can mean the difference between running a business profitably and spinning on the proverbial hamster wheel to nowhere. COGS includes all of the direct costs involved in manufacturing products. Middle East, Nordics and Other Regions (opens in new tab)Ĭost of goods sold (COGS) may be one of the most important accounting terms for business leaders to know.

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Formula for cogs