Investing term

What is Cost of goods sold (COGS)?

The direct cost of producing whatever was sold — materials, direct labor, manufacturing overhead.

Cost of goods sold (COGS) is the direct cost of producing whatever a company sold — raw materials, direct labour, and manufacturing overhead. It's the first cost subtracted from revenue on the income statement, and revenue minus COGS gives gross profit.

Tracking COGS as a share of sales reveals pricing power and efficiency. A company that keeps COGS low relative to revenue — because customers pay a premium, or because it produces cheaply — has a high gross margin and more money left to cover everything else. Rising COGS as a share of sales warns that input costs are climbing or pricing power is fading. It's a fundamental gauge of how profitable the core product is before overhead, marketing, and other costs enter the picture.

The direct cost of what sold
RevenueTOP LINE$100Gross profit$40− $60 cost of goods soldOperating income$18− $22 operating expensesNet incomeBOTTOM LINE$10− $8 interest & tax

Cost of goods sold is the direct cost of producing what was sold — materials, labour, factory overhead. Subtracted from revenue, it gives gross profit; watched as a share of sales, it reveals pricing power.

For example

A company with $100M revenue and $60M cost of goods sold has $40M of gross profit — the $60M being the direct cost of making what it sold.

Learn it by doing

That's Cost of goods sold (COGS) in theory — it clicks when you use it. Practise it hands-on in a free, interactive lesson (Stage 14, Reading Financial Statements).

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Why it matters to you

COGS matters because it determines gross profit — the raw material from which a company pays for everything else. Watching COGS as a percentage of revenue is a direct read on pricing power and production efficiency: a business whose COGS stays low relative to sales has room to invest, weather cost shocks, and still profit, while one with high or rising COGS is squeezed from the start. It's often the first place competitive strength (or weakness) shows up.

⚠ Missing rising COGS as a share of sales

COGS creeping up as a percentage of revenue signals eroding pricing power or rising input costs — a squeeze on gross margin that flows through to every profit line below it. Watching only absolute revenue growth while ignoring the COGS ratio can miss a business whose core product is becoming less profitable, even as sales rise.

Frequently asked questions

What is cost of goods sold?

Cost of goods sold (COGS) is the direct cost of producing the products or services a company sold — materials, direct labour, and manufacturing overhead. It's subtracted from revenue to give gross profit, representing the immediate cost of making what was sold before other expenses.

What's the difference between COGS and operating expenses?

COGS is the direct cost of producing what's sold — materials and production labour. Operating expenses are the indirect costs of running the business, like marketing, R&D, and administration. COGS is subtracted first to get gross profit; operating expenses are subtracted next to get operating income.

Why track COGS as a percentage of revenue?

Because it reveals pricing power and production efficiency. A low, stable COGS ratio means a company keeps more of each sales dollar as gross profit — a sign of a strong product or efficient operations. Rising COGS as a share of sales warns of climbing input costs or fading pricing power.

Read the full guide

Reading the numbersWhat Is Revenue? And Why It's Not the Same as ProfitRevenue is the 'top line' — all the money a company brings in before any costs. What revenue actually is, why it's not the same as profit, and how to read it.7 min read

Related terms

Accounts receivable (A/R)Money customers owe the company for goods or services already delivered but not yet paid.AccrualsAccounting entries that record revenue or expense before cash actually moves.Annual reportThe yearly disclosure that includes audited financials, MD&A, and footnotes — the primary source for serious investors.Balance sheetThe 'photo' statement — what the company owns, what it owes, and what's left for owners, on a single date.
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