Cost of Goods Sold

2026-03-06 The direct costs of producing the goods or services a business sells — materials, ingredients, and direct labor — subtracted from revenue to calculate gross profit.

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 $100,000 in revenue and $35,000 in COGS has $65,000 in gross profit and a 65% gross margin. Whether the business is ultimately profitable depends on whether that $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.

Cost of Goods Sold

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