Cost of goods sold (COGS) is the direct cost of producing the goods or delivering the services that generate revenue — materials, direct labor, and direct manufacturing or service-delivery overhead. COGS does not include sales, marketing, administrative salaries, or general overhead. Getting COGS right is the foundation of gross margin analysis and almost every pricing decision.
COGS is the bridge between revenue and gross profit on the income statement. For a product business, COGS includes raw materials, direct labor in production, freight in, packaging, and a portion of manufacturing overhead. For a service business, COGS includes the labor directly delivering services to clients, subcontractor costs, materials consumed on the job, and any direct project expenses. The line between COGS and operating expenses can be ambiguous — is a salaried project manager COGS or overhead? Is software used by the production team COGS? Consistent allocation matters more than perfect precision. The wrong split inflates apparent gross margin and hides the true unit economics.
COGS = Beginning Inventory + Purchases − Ending Inventory (for product businesses) COGS = Direct Labor + Direct Materials + Subcontractor Costs + Direct Project Expenses (for service businesses)
COGS sets the ceiling on gross margin, which sets the ceiling on every other profitability metric. Under-reported COGS (a common error) inflates gross margin and operating margin on paper, leading to optimistic decisions on pricing, hiring, and spending. Over-reported COGS (less common but it happens with hourly contractors and overhead misallocations) understates gross margin and leads owners to think they have a pricing problem when they have a cost reporting problem. Building an accurate COGS line is the single most important step toward financial clarity in a growing business.
Fynso reads your accounting categorization and flags common misallocations — payroll for salespeople miscoded to COGS, software for non-production use included in COGS, or vice versa. The brief decomposes COGS by category over time so changes are explainable: "COGS rose 3 points this quarter; materials were flat but subcontractor costs rose 2.5 points after the new contract." When COGS components move outside your historical range, Fynso surfaces the specific line driving it so the conversation moves from "profits are down" to "the X supplier is 8% more expensive than last year."
Restaurants
Restaurant COGS includes food, beverage, paper goods, and direct kitchen labor. Food cost runs 28–32% of revenue, labor cost 28–35%. The right benchmark depends on concept — fast-casual runs lower food cost than full-service, but higher labor as a percentage. Tracking food cost weekly is the operator's most important COGS discipline.
Professional services
An agency's COGS is billable labor (employees and contractors), direct project expenses (travel, third-party services), and a portion of project tools. Non-billable employees (sales, accounting, junior employees in training) belong in operating expenses. Drawing this line correctly is the single most common accounting mistake in services businesses.
Manufacturing
A small manufacturer's COGS includes raw materials, direct production labor, freight in, and an allocated portion of factory overhead (factory rent, utilities, equipment depreciation). The allocation method matters — direct labor hours, machine hours, or activity-based costing each produce different per-unit COGS. The right method depends on what drives cost variation.
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