Accounting
COGS (Cost of Goods Sold)
The direct cost of producing or delivering what your business sells — sits above operating expenses on the P&L and drives your gross margin.
Cost of Goods Sold captures the money you spent specifically to produce and deliver the revenue you booked. For a restaurant, that is food and beverage cost plus kitchen labor. For a contractor, it is materials, subcontractor billings, and job-site labor. For a professional-services firm, it is billable-staff compensation. For an e-commerce business, it is landed product cost, inbound freight, and fulfillment.
Getting COGS classification right is the difference between a P&L that tells you the truth and one that flatters your gross margin. A common mistake is leaving direct labor in 'salaries and wages' under operating expenses — the P&L then shows a beautiful gross margin that has nothing to do with reality.
Once COGS is classified consistently, gross margin (revenue minus COGS, divided by revenue) becomes the single most diagnostic number on the P&L. Trending it month over month is how you catch pricing pressure, input-cost inflation, or a shift toward lower-margin customers before it eats the business.
Common pitfalls
- Putting all payroll in one operating-expense bucket — direct service-delivery labor belongs in COGS, and mixing them makes gross margin meaningless
- Including inbound freight but not outbound (or vice versa) — pick a rule and apply it every month
- Changing what goes into COGS mid-year — breaks year-over-year comparability and confuses lenders
- Under-classifying credit-card processing fees for card-heavy businesses — many treat interchange as opex when it belongs in COGS
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