Cost of Goods Sold
What is Cost of Goods Sold?
Cost of goods sold (COGS) is the direct cost of delivering the services and products you sold in a period — principally the materials and parts consumed and the direct (job) labor that produced the work. It includes only costs that rise and fall with the work done; it excludes overhead and indirect costs like rent, office salaries, advertising, and owner pay, which sit lower on the income statement. COGS is the figure subtracted from revenue to get gross profit, and therefore the input to gross margin = (revenue − COGS) ÷ revenue. Drawing the line correctly between direct and indirect cost is what makes margin meaningful.
COGS is the cost of the work itself — the parts a job consumes and the labor of the hands that did it — and nothing else. The discipline is in the boundary: a cost belongs in COGS only if it varies with the work performed. The technician’s hours on a job count; the office manager’s salary does not. Materials count; the rent does not.
That line matters because everything downstream depends on it. The gross-margin figure is revenue minus COGS, so misclassifying an indirect cost as direct (or the reverse) distorts how profitable the work appears. Fold overhead into COGS and your jobs look unprofitable while your overhead looks small; make the opposite mistake and job margins flatter you while a bloated cost base hides.
In a service business, direct labor is usually the largest piece of COGS, which is why the fully burdened cost of that labor — wage plus burden — is what belongs here, not the bare wage. Get COGS right and gross margin tells the truth.