What is cost of goods sold (COGS)?

Cost of goods sold (COGS), sometimes called Cost of Sales, is the direct cost of producing or purchasing the goods or services a business sells during a specific period. COGS typically includes materials, labor, and other expenses directly tied to producing products or providing services and is subtracted from revenue to calculate gross profit.

Example: A retailer sells products for $10,000 that cost $6,000 to purchase from suppliers. The retailer's COGS is $6,000, and its gross profit is $4,000.

Related terms: Gross Profit, Revenue, Inventory, Income Statement