Skip to main content
Mobius
Beginner

What is COGS

Full name: Cost of Goods Sold

Also known as: cost of sales, cost of goods sold, how to calculate COGS, COGS formula

Definition

COGS (cost of goods sold) is the cost of the goods or services sold in a period: goods, materials and direct labour. Revenue minus COGS is gross profit.

Why it matters

COGS decides how much of each sale is left to pay for everything else, so it sets the floor under your prices and the gross margin you can reach.

Common mistakes

Putting office rent, marketing or admin salaries into COGS. They are overhead.

Related terms

Worked exampleIllustration

A shop's month and a studio's project

Stock card: a shop, one month

  • Opening stock₪20,000
  • Purchases+₪15,000
  • Closing stock, still on the shelf-₪18,000
  • COGS₪17,000

Job card: a website project in a studio

  • Freelance designer₪3,000
  • Licences and stock images₪200
  • The client's first year of hosting₪400
  • Direct cost of the project₪3,600
  • The studio's rent: overhead, not in the job

Steps

  1. Shop: opening stock plus purchases minus closing stock, 20,000 + 15,000 - 18,000.₪17,000

  2. The shop sold ₪30,000 excluding VAT, so its gross profit is 30,000 - 17,000, a gross margin of 43%.₪13,000

  3. Studio: the project's direct cost is the freelancer, the licences and the hosting, 3,000 + 200 + 400.₪3,600

  4. The project was priced at ₪10,000, so its gross profit is 10,000 - 3,600.₪6,400

The studio's rent is in neither number: it is overhead. And the ₪18,000 still on the shop's shelf is not COGS until it sells.

Illustration

What left the shelf

  1. Opening stock₪20,000
  2. Purchases+₪15,000
  3. Available to sell₪35,000
  4. Closing stock, still on the shelf-₪18,000
  5. Cost of goods sold (COGS)₪17,000

COGS is ₪17,000. On ₪30,000 of sales that leaves ₪13,000 of gross profit, a gross margin of 43%. The ₪18,000 still on the shelf is not COGS until it sells.

The shop's stock card as steps: what was on the shelf, plus what was bought, minus what is still on the shelf at the end, is the cost of the goods that were sold.

Overhead or direct cost?

Overhead

Keeps the business open, whatever it sells. Due even in a month with no projects.

  • Studio rentPaid every month, whichever projects come in.
  • BookkeepingServes the whole business, not one job.
  • Software for the whole studioUsed on every project and tied to none of them.
  • Part time office managerRuns the office and bills no client.

Direct cost (COGS)

Leaves with one job or one sale. No job, no cost.

  • A freelance designer paid for one projectHired for this project only, gone when it ends.
  • Stock images bought for one clientBought for one client and used in one job.
  • The client's first year of hostingBought for this client's site, part of the job's cost.
  • The designers' hours on client workEach hour can be traced to the job it was spent on.
The studio's costs from the overhead and COGS examples, sorted. The test: can you trace the cost to one job or one sale?

Definition

COGS, short for cost of goods sold and also called the cost of sales, is what the goods or services a business sold in a period cost it to make or buy. For a business with stock, the cost of the stock includes the purchase price, the cost of turning materials into products and a share of production overheads, and it becomes an expense, COGS, only when the goods are sold. Stock still on the shelf is not COGS yet. So COGS is neither "direct costs only", which is a common small business simplification, nor "all the direct costs of the period". A trading business works it out with the stock formula: opening stock + purchases - closing stock. A service business adds up the direct labour on client work, subcontractors, and the materials and licences bought for each job, and a pure service business with no stock often shows no separate cost of sales line at all. What goes in: goods for resale, raw materials, packaging, direct labour and shipping from the supplier. What stays out: office rent, marketing, admin salaries, shipping to customers, which is a selling expense, and the owner's general time. Revenue minus COGS is gross profit, so COGS feeds both gross profit and gross margin. The way stock is valued, for example first in first out or a weighted average, changes COGS when purchase prices rise.

Why it matters

If direct costs are too high, growing sales only grows the losses. And because stock on the shelf is not COGS yet, buying a lot at the end of a month does not lower that month's profit.

Directly related: Gross Profit, Gross margin, Revenue.

Formula

COGS = Beginning Inventory + Purchases - Ending Inventory

Improvement tips

  • Count your stock at least at year end, and ideally every month, so COGS reflects what actually left the shelf.
  • Record purchases net of supplier discounts and returns, which is the figure the stock formula expects.
  • In a service business, log the hours and subcontractor costs of each job, so every job has its own cost of sales.
  • Negotiate volume prices with suppliers and watch waste and shrinkage, since both raise COGS directly.

Common mistakes

  • Treating every purchase as COGS. Stock still on the shelf is not an expense until it sells.
  • Leaving direct labour out of COGS in a service business, which makes every job look more profitable than it is.
  • Counting shipping to customers as COGS. It is a selling expense, while shipping from the supplier belongs in COGS.

Related terms

FinanceBeginner

Gross Profit

Gross profit is revenue minus the cost of goods sold (COGS): what is left from sales after goods, materials and direct labour. Rent and salaries come from it.

FinanceBeginner

Gross margin

Gross margin is the share of revenue left after the cost of goods sold: (revenue - COGS) ÷ revenue × 100. At 60%, 60 agorot of each shekel remain.

FinanceBeginner

Revenue

Revenue is everything a business sold in a period, before any costs and without the VAT on the invoice. It is the P&L's top line, not profit and not cash.

FinanceBeginner

Overhead

Overhead is the indirect cost of running a business, like rent, bookkeeping, insurance and admin salaries, that cannot be traced to one product or customer.

FinanceBeginner

P&L

A P&L (profit and loss statement, or PnL) sums up a business's revenue and expenses for a period and shows if it made or lost money. Profit on it is not cash.

StartupsIntermediate

Scaling

Scaling is growth in which revenue rises faster than costs, so each extra customer adds more profit. In plain growth, costs rise at the same pace as revenue.

From the blog

Negotiating With Suppliers: Terms That Protect Cash

How to negotiate supplier terms that improve cash flow, margin, delivery reliability, and operating stability without damaging the relationship.

Opening a Beauty Clinic in Israel: The Business Side

How to open a cosmetics clinic in Israel as a business, not just a profession: location, licensing, treatment prices, filling the calendar and year one.

Quick check

A shop starts the month with ₪20,000 of stock, buys ₪15,000 more and ends with ₪18,000 on the shelf. What is its COGS?

Choose an answer

Frequently asked questions

Do I need to understand COGS before I start a business?
Yes. COGS tells you what each sale really costs you, which is the floor under your price. Price below it and every sale loses money.
When does COGS first become relevant for a new business?
As soon as you know which goods, materials or direct labour a sale needs. Working it out before launch shows whether your planned price leaves enough gross profit.
How do I estimate COGS before launch?
For one unit or one job, list the goods or materials, the direct labour, the packaging and the shipping from the supplier, and add them up. Multiply by the number of units you expect to sell in a month.
Does a service business with no stock have COGS?
Yes, even when its books show no separate line for it. Its cost of sales is the direct labour on client work, subcontractors, and the materials and licences bought for the job. A consulting firm's COGS includes the pay of the consultants on client projects.
Why does COGS matter for a business that is already running?
It shows what each item or service costs you to deliver. Watching it month by month shows supplier price rises before they eat your margin.
What goes wrong when a business ignores its COGS?
You can sell at a loss without noticing, especially when material or supplier prices rise. High sales then drain the cash instead of filling it.
How do I track COGS without stopping daily work?
Connect your stock records or bookkeeping to your sales, so the cost of each sale is recorded with it. A service business can log hours and subcontractor costs per job.
How can I lower COGS to improve profit?
Negotiate volume discounts, find cheaper materials of the same quality, cut waste and packaging costs, and make production or delivery more efficient.
What does COGS mean in plain words?
COGS stands for cost of goods sold. It is what the things you sold cost you to make or buy: the goods, the materials and the direct work.
Is COGS complicated to calculate?
No. With stock, it is opening stock plus purchases minus closing stock. Without stock, add up the direct costs of the jobs you delivered in the period.
Why do I have to count stock at the end of the year?
A business with stock counts it at year end, following the procedure in the Israeli Income Tax (Bookkeeping) Instructions, and the closing stock goes straight into the COGS formula. That count is what turns the formula from an exercise into an obligation. Educational material, not tax or legal advice.
What is the difference between COGS and operating expenses?
COGS is only the direct cost of what you sold, like the fabric in a shirt. Operating expenses are the costs of running the business, like rent, marketing and office bills, and they are paid from the gross profit left after COGS.

Sources: IFRS Foundation, IAS 2 Inventories, checked September 2026, Israel, Income Tax (Bookkeeping) Instructions, 1973, section 26, the stock count, checked September 2026

Last reviewed: 2026-09-23

I have worked with

What Clients Say

From different fields, at different stages of business

Dan Manto

Eclipse Capital

Real Estate Investment and Finance, USA

Arty McLabin

GameReady

Game Development Education and Outsourcing, International

Anna, Beautician

Anna

Beautician

After I finished a cosmetology course at a leading company, I was confused. I didn't know how to open a business, what to sell from home, or how to bring in clients. Since I reached out to Mobius, everything has changed. We built an organized plan with clear steps and no unnecessary risks. Today I see results, and I'm growing and developing every month.

Mark, Massage therapist, Gan Yavne

Mark

Massage therapist, Gan Yavne

When I finished a massage course, I imagined a different world. I found out it's a hard field, and financial stability isn't easy to find. When I came to Mobius, something changed. We started an organized process and built a business plan. Without Mobius? I probably would have given up. Today I believe in myself and in my own path.

Struggling with the numbers side of your business?

Alex helps Israeli owners get cash flow, pricing and profit under control. The first call is free.

+972 055-248-6151. Better on WhatsApp: I am in meetings most of the day and answer as soon as I am free.