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 Software as a Service (SaaS) — the Cost of Goods Sold includes hosting and monitoring costs, account management, license fees, web development and support costs, training, professional services, and subscriptions.
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.
To calculate the Cost of Goods Sold, you first have to calculate the cost of materials needed to make the product at the start of the year.
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.