Cost of goods sold (COGS) is the total direct cost of producing what the business sells during a period. For a restaurant: food, beverages, and the direct labor involved in preparation. For a retailer: the wholesale cost of merchandise. For a manufacturer: raw materials and production labor.
COGS does not include indirect costs like rent, utilities, marketing, or administrative salaries — those are operating expenses. The distinction matters because:
Revenue − COGS = Gross profit Gross profit − Operating expenses = Operating income (net income before taxes)
A business with 35,000 in COGS has 65,000 covers operating expenses.
COGS can be calculated two ways:
- From purchases: Beginning inventory + Purchases − Ending inventory = COGS
- From sales: Sum of (recipe cost × units sold) for every item — this is theoretical COGS
The difference between these two numbers is the food cost variance — waste, theft, portioning errors, and recording mistakes. See Food Costing and Waste Reduction.