Definition:

Cost of goods sold or COGS is the amount spent to make a product or deliver a service. COGS can also be called “Direct Costs”.

Example:

COGS includes the variable costs of raw materials, purchased components used to make a product and the labor to assemble it or deliver the service, but not shared or fixed costs like the factory building, assembly line, or management salaries (which don’t increase if you make 1 extra product).

Why it matters:

Understanding how profitable (or not) our various products or services are is vital.

Revenue minus COGS is known as our Gross Margin, or the amount of money we make on each sale that goes towards paying for all our other operating costs.

A high gross margin means that an unprofitable company could become profitable by growing, whereas a low or negative gross margin means that growth will only increase losses.