Cost Of Goods Sold (COGS)

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What is cost of goods sold (COGS)?


Definition of cost of goods sold (COGS)

The cost of goods sold (COGS) is how much it costs to produce a finished product for the market. Put simply: it is the cost of making the goods a company sells, including the cost of materials, production time and labor. 

For traditional manufacturing industries, the cost of goods sold includes expenses like inventory, but in the development world — and particularly when it comes to SaaS — the COGS includes hosting and monitoring costs, account management, license fees, web development and support costs, training, professional services, and subscriptions.

What is COGS useful for?

Cost of goods sold is vital for determining the profit margin of a business, and for calculating how profitable and scalable an organization is, or can be. 

How to calculate cost of goods sold

To calculate the COGS, you first have to calculate the cost of materials needed to make the product at the start of the year.

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To do this, add the costs of any purchases necessary, as well as labor fees, shipping costs, overhead expenses (like electricity or office space), subscriptions, licenses, hosting and any other professional services that you’ve paid for.

After that calculation, you then need to subtract the cost of any materials or inventory (unlikely with SaaS) that are leftover at year-end, and you’ll then arrive at the cost of goods sold of your finished product.

General FAQ

What information is needed for calculating the cost of goods sold?
To calculate the cost of goods sold, you first need the cost of all the materials required to make a product at the beginning of the relevant period. You also need a full breakdown of the cost of all expenditures related to the product, such as labor, shipping, and development/manufacturing overheads. Finally, the cost of materials left in inventory is also essential. This information gives you all you need to make the calculation.
What is the cost of goods sold in accounting?
The cost of goods sold is the cost of bringing all sold products to customers, including sourcing raw materials, delivery, distributor fees, etc. In accounting terms, it is a simple equation, once you have all the data in place.
What does the cost of goods sold represent for software companies?
For software companies, the cost of goods sold will represent all the expenses required to bring software to the customer. This includes personnel costs for designers, developers and customer support, as well as hosting, third-party software costs, the hardware used, and any other relevant costs.

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