Term · Profitability & Growth
Cost of Sales
In briefCost of Sales (Cost of Goods Sold, COGS) are the expenses directly attributable to the products or services sold in a period, such as material and production costs. Revenue minus Cost of Sales equals gross profit; the item is more narrowly defined than total operating costs.
Definition
Cost of Sales, also known as Cost of Goods Sold, are the expenses of a period that are directly attributable to the products or services sold. They typically comprise material, manufacturing and direct service costs. Revenue minus Cost of Sales equals gross profit.
How it is calculated
Formula. Gross profit = Revenue − Cost of Sales
Why it matters for small caps
For small companies, the trend in cost of sales relative to revenue shows whether economies of scale or pricing advantages are taking hold or whether costs are eating up growth. Jumps in this item point to margin pressure or a change in accounting treatment.
Common misreadings
- Cost of Sales is equated with total operating costs, even though selling, general and administrative expenses and research costs are reported separately.
In the process
Frequently asked
What belongs in Cost of Sales?
Directly attributable expenses such as material, manufacturing and direct service costs of the goods or services sold.
What is the difference from total costs?
Cost of Sales captures only the cost of revenue. Selling, administration and research are reported separately in the income statement.
How are Cost of Sales and gross margin related?
Gross margin is calculated as revenue minus Cost of Sales relative to revenue; rising cost of sales pushes it down.
Related terms
Education only, not investment advice. Ranges and thresholds are didactic orientation values, not an official standard.