Cost of goods sold (COGS) is the total direct cost of producing or acquiring the goods a business sells during a period — including raw materials, ingredients, components, wholesale purchase prices, and direct labor tied to production. Distinguish acquisition or production cost from the timing at which that cost becomes an expense on sale.
Quick answers
What is cost of goods sold? COGS is the direct cost of the goods you sold. For a retailer, it is what you paid your suppliers for the products on the shelf. For a restaurant, it is the ingredient cost of every dish served. For a manufacturer, it is the raw materials and direct labor that went into the finished product. COGS appears on the income statement directly below revenue — revenue minus COGS equals gross profit.
What is the COGS formula? Beginning Inventory + Purchases − Ending Inventory = COGS. Beginning inventory is what you had on hand at the start of the period. Purchases is everything you bought from suppliers during the period. Ending inventory is what remains unsold at the end. The difference is what was consumed — your cost of goods sold.
What is the difference between COGS and operating expenses? COGS is the direct cost of producing or acquiring the goods you sell — materials, ingredients, wholesale product cost. Operating expenses (opex) are the indirect costs of running the business — rent, utilities, salaries for non-production staff, marketing, insurance, software. COGS scales with sales volume. Opex is largely fixed regardless of how many units you sell in a given period.
What is a good COGS percentage? Use consistent cost classification and compare the resulting gross profit with the operating costs it must cover. Ingredient-only food cost is not directly comparable with a manufacturer's COGS including labor and production overhead.
Is COGS the same as food cost? In restaurants, food cost is the COGS for food items specifically. Beverage cost is COGS for beverages. Combined, they make up the restaurant's total COGS. The terms are used interchangeably in food service, but COGS is the broader accounting term that applies across all industries.