Cost Of Goods Sold (COGS)
Date created: Oct 12, 2022 • Last updated: Mar 18, 2024
What is Cost Of Goods Sold?
The Cost Of Goods Sold (COGS) is the measure of direct costs incurred by a company to manufacture or deliver their product or service. Costs typically include raw material and direct labour, but this varies from business to business, depending on the products or services that are being sold. COGS is the building block to understanding Gross Margin and Gross Margin Percent.
Cost Of Goods Sold Formula
How to calculate Cost Of Goods Sold
A SAAS based Company A has the following costs that were incurred in a month: Amazon Web Services hosting costs: $30,000 Site Reliability Engineering Salaries: 45,000 Customer Support Salaries: $10,000 Consultant hired to work on infrastructure: $5,000 The total COGS for Company A this month is: $90,000
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How to visualize Cost Of Goods Sold?
Use a summary chart to visualize your Cost Of Goods Sold data and compare it to a previous time period.
Cost Of Goods Sold visualization example
Summary Chart
Cost Of Goods Sold
Chart
Measuring Cost Of Goods SoldMore about Cost Of Goods Sold
COGS is an important financial metric that measures operating efficiency and performance. COGS categorization is subject to the nature of the business. Even in the same industry, some expenses will be categorized as a COG but in other companies, they will be treated as operating expenses.
For software companies, Cost Of Goods Sold (COGS) can include, for example, hosting fees, third party licensing fees, credit card processing fees, customer onboarding fees, and support costs. For a company with a physical product, COGS for a given time period is calculated by adding the inventory left over from the last period and any new purchases, then subtracting the inventory left over at the end of the period.
COGS helps the business and its investors and analysts track performance and understand the bottom line. It is tracked as a business expense and is subtracted from a company’s revenue to get Gross Margin. A favourable trend for COGS depends on the stage the product and organization is at. In general, COGS should become more efficient over time resulting in increased gross margins.
Recommended resources related to Cost Of Goods Sold
For a short read on how this applies to SaaS businesses, check out this Openview Labs post.Metric Toolkit
Start tracking your Cost Of Goods Sold data
Use Klipfolio PowerMetrics, our free analytics tool, to monitor your data. Choose one of the following available services to start tracking your Cost Of Goods Sold instantly.