Question

What does the cost of goods or services sold include?

Answer 1

"Cost of goods sold" (COGS) or "cost of services sold" (often called cost of sales or cost of revenue) is the direct costs incurred to produce the goods sold or to deliver the services performed. It excludes operating and administrative overhead that are not directly tied to production or service delivery.

Typical components

- For product (manufacturing/retail) businesses:
- Beginning inventory + purchases − ending inventory (the inventory flow)
- Direct materials and components used in the product
- Direct labor (wages, payroll taxes and benefits for production workers)
- Manufacturing/production overhead allocated to products, such as:
- Factory utilities, rent, maintenance
- Depreciation of production equipment
- Factory supplies and quality-control costs
- Freight-in (shipping cost to bring materials into inventory)
- Cost of goods purchased for resale (for retailers/wholesalers)
- Packaging and costs required to make the product saleable (when part of production)

- For service businesses:
- Direct labor of service providers (salaries, payroll taxes, benefits)
- Subcontractor fees directly tied to delivering the service
- Materials and consumables used to deliver the service
- Travel, lodging and other costs directly attributable to providing the service
- Allocated direct overhead (if the company capitalizes or allocates some overhead to service delivery)
- Costs of specialized software, hosting or royalties that are billed by cost of revenue policies

What is not included
- Selling, general and administrative expenses (marketing, sales commissions, office rent)
- Interest expense, R&D, and most corporate overhead
- Freight-out (shipping to customers) is usually an operating expense, not COGS
- Sales taxes collected from customers

Basic formula (products):
COGS = Beginning inventory + Purchases + Direct production costs − Ending inventory

Note: Exact treatment (what is included and how overhead is allocated) depends on accounting policy (GAAP/IFRS), the industry and whether the business uses absorption costing, variable costing, or specific tax rules. If you tell me your business type (manufacturing, retail, software, professional services), I can give a more specific list for your situation.