Cost of Sales
Financials
Industry:
Sector Agnostic
Short Definition
Cost of Sales (CoS) — also called Cost of Goods Sold (COGS) or Cost of Revenue — is the direct cost to make and deliver what you sell (materials, manufacturing/fulfilment, hosting, payment processing, delivery, required third-party APIs). It excludes operating expenses like Sales & Marketing, Research & Development, and General & Administrative Expenses.
Short Definition
Cost of Sales (CoS) — also called Cost of Goods Sold (COGS) or Cost of Revenue — is the direct cost to make and deliver what you sell (materials, manufacturing/fulfilment, hosting, payment processing, delivery, required third-party APIs). It excludes operating expenses like Sales & Marketing, Research & Development, and General & Administrative Expenses.
Short Definition
Cost of Sales (CoS) — also called Cost of Goods Sold (COGS) or Cost of Revenue — is the direct cost to make and deliver what you sell (materials, manufacturing/fulfilment, hosting, payment processing, delivery, required third-party APIs). It excludes operating expenses like Sales & Marketing, Research & Development, and General & Administrative Expenses.
Why it matters for Investors
Gross margin: Revenue − COS = gross profit; lower COS% = stronger margins.
Scalability: Reveals whether cost per customer/order falls or rises as you grow.
Pricing & vendor leverage: If COS grows faster than revenue, you likely need pricing tweaks or better supplier terms.
Why it matters for Investors
Gross margin: Revenue − COS = gross profit; lower COS% = stronger margins.
Scalability: Reveals whether cost per customer/order falls or rises as you grow.
Pricing & vendor leverage: If COS grows faster than revenue, you likely need pricing tweaks or better supplier terms.
Why it matters for Investors
Gross margin: Revenue − COS = gross profit; lower COS% = stronger margins.
Scalability: Reveals whether cost per customer/order falls or rises as you grow.
Pricing & vendor leverage: If COS grows faster than revenue, you likely need pricing tweaks or better supplier terms.
Formula
Inventory Businesses (Classic View)
Services/ Software View (Policy Driven)
Use the variant that matches your model and apply it consistently.
Practical considerations:
Define the bucket: Put only direct costs to make/deliver the product/service here (e.g., inventory, hosting, third-party platform/API fees, shipping, payment processing, frontline support/implementation tied to delivery).
Exclude overhead: Sales & marketing, product/R&D, G&A, brand ads, and unrelated payroll belong in operating expenses—not COS.
Match cost to revenue: Record COS in the same period as the revenue (recognize inventory when shipped; accrue monthly hosting/usage fees even if billed later).
Labor placement: Decide which roles sit in COS (e.g., support/implementation that fulfill contracts), document it, and stay consistent.
Discounts & returns: Book discounts, credits, and refunds as reductions to revenue (contra-revenue), not as COS.
Mixed offerings: If you sell hardware + subscription, split costs with a simple driver (units, revenue %, or usage) and keep the method fixed.
Reconcile monthly: Tie COS to vendor bills, payroll, and inventory movements; flag big one-offs so gross-margin trends remain comparable.
CapEx vs expense: Capital equipment is depreciated over time; only the depreciation tied to delivery hits COS.
What counts, by industry:
SaaS (subscriptions): Cloud/servers, databases/CDN, third-party APIs used in-product, customer support & onboarding time, payment processing fees. Not COS: Sales & Marketing, R&D/Engineering, office rent.
Example: Revenue $50,000; cloud $9,000 + support $3,000 + payment fees $1,000 → COS $13,000 → Gross margin = 74%.
Usage-based SaaS: Everything in SaaS plus variable compute, data transfer/egress, and per-unit vendor fees tied to customers’ usage.
E-commerce: Product cost, packaging, pick-pack-ship/ fulfillment, shipping, returns handling, payment fees/marketplace commissions.
Example: Buy 100 units @ $40 → Inventory $4,000. Ship 30 this month → COS $1,200; Inventory left $2,800.
Marketplaces: Payment processor fees, payouts/revenue share to sellers/creators, fraud/chargebacks, transaction support.
Hardware/IoT: Parts & materials, manufacturing/assembly, freight & import duties, warranties/repairs, required device connectivity (e.g., SIM/data plan).
Media/Streaming: Content licenses/royalties, creator payouts, bandwidth/CDN, encoding/hosting.
Professional services: Wages of people doing the billable work, subcontractors, delivery tools/software used to serve the client.
Not COS: sales, account management (unless they deliver the service), back-office.
Formula
Inventory Businesses (Classic View)
Services/ Software View (Policy Driven)
Use the variant that matches your model and apply it consistently.
Practical considerations:
Define the bucket: Put only direct costs to make/deliver the product/service here (e.g., inventory, hosting, third-party platform/API fees, shipping, payment processing, frontline support/implementation tied to delivery).
Exclude overhead: Sales & marketing, product/R&D, G&A, brand ads, and unrelated payroll belong in operating expenses—not COS.
Match cost to revenue: Record COS in the same period as the revenue (recognize inventory when shipped; accrue monthly hosting/usage fees even if billed later).
Labor placement: Decide which roles sit in COS (e.g., support/implementation that fulfill contracts), document it, and stay consistent.
Discounts & returns: Book discounts, credits, and refunds as reductions to revenue (contra-revenue), not as COS.
Mixed offerings: If you sell hardware + subscription, split costs with a simple driver (units, revenue %, or usage) and keep the method fixed.
Reconcile monthly: Tie COS to vendor bills, payroll, and inventory movements; flag big one-offs so gross-margin trends remain comparable.
CapEx vs expense: Capital equipment is depreciated over time; only the depreciation tied to delivery hits COS.
What counts, by industry:
SaaS (subscriptions): Cloud/servers, databases/CDN, third-party APIs used in-product, customer support & onboarding time, payment processing fees. Not COS: Sales & Marketing, R&D/Engineering, office rent.
Example: Revenue $50,000; cloud $9,000 + support $3,000 + payment fees $1,000 → COS $13,000 → Gross margin = 74%.
Usage-based SaaS: Everything in SaaS plus variable compute, data transfer/egress, and per-unit vendor fees tied to customers’ usage.
E-commerce: Product cost, packaging, pick-pack-ship/ fulfillment, shipping, returns handling, payment fees/marketplace commissions.
Example: Buy 100 units @ $40 → Inventory $4,000. Ship 30 this month → COS $1,200; Inventory left $2,800.
Marketplaces: Payment processor fees, payouts/revenue share to sellers/creators, fraud/chargebacks, transaction support.
Hardware/IoT: Parts & materials, manufacturing/assembly, freight & import duties, warranties/repairs, required device connectivity (e.g., SIM/data plan).
Media/Streaming: Content licenses/royalties, creator payouts, bandwidth/CDN, encoding/hosting.
Professional services: Wages of people doing the billable work, subcontractors, delivery tools/software used to serve the client.
Not COS: sales, account management (unless they deliver the service), back-office.
Formula
Inventory Businesses (Classic View)
Services/ Software View (Policy Driven)
Use the variant that matches your model and apply it consistently.
Practical considerations:
Define the bucket: Put only direct costs to make/deliver the product/service here (e.g., inventory, hosting, third-party platform/API fees, shipping, payment processing, frontline support/implementation tied to delivery).
Exclude overhead: Sales & marketing, product/R&D, G&A, brand ads, and unrelated payroll belong in operating expenses—not COS.
Match cost to revenue: Record COS in the same period as the revenue (recognize inventory when shipped; accrue monthly hosting/usage fees even if billed later).
Labor placement: Decide which roles sit in COS (e.g., support/implementation that fulfill contracts), document it, and stay consistent.
Discounts & returns: Book discounts, credits, and refunds as reductions to revenue (contra-revenue), not as COS.
Mixed offerings: If you sell hardware + subscription, split costs with a simple driver (units, revenue %, or usage) and keep the method fixed.
Reconcile monthly: Tie COS to vendor bills, payroll, and inventory movements; flag big one-offs so gross-margin trends remain comparable.
CapEx vs expense: Capital equipment is depreciated over time; only the depreciation tied to delivery hits COS.
What counts, by industry:
SaaS (subscriptions): Cloud/servers, databases/CDN, third-party APIs used in-product, customer support & onboarding time, payment processing fees. Not COS: Sales & Marketing, R&D/Engineering, office rent.
Example: Revenue $50,000; cloud $9,000 + support $3,000 + payment fees $1,000 → COS $13,000 → Gross margin = 74%.
Usage-based SaaS: Everything in SaaS plus variable compute, data transfer/egress, and per-unit vendor fees tied to customers’ usage.
E-commerce: Product cost, packaging, pick-pack-ship/ fulfillment, shipping, returns handling, payment fees/marketplace commissions.
Example: Buy 100 units @ $40 → Inventory $4,000. Ship 30 this month → COS $1,200; Inventory left $2,800.
Marketplaces: Payment processor fees, payouts/revenue share to sellers/creators, fraud/chargebacks, transaction support.
Hardware/IoT: Parts & materials, manufacturing/assembly, freight & import duties, warranties/repairs, required device connectivity (e.g., SIM/data plan).
Media/Streaming: Content licenses/royalties, creator payouts, bandwidth/CDN, encoding/hosting.
Professional services: Wages of people doing the billable work, subcontractors, delivery tools/software used to serve the client.
Not COS: sales, account management (unless they deliver the service), back-office.
Worked Example
Industry: SaaS
Month: March
Line item (direct to delivering the service) | Amount ($) |
|---|---|
Hosting / cloud (compute, storage, CDN) | $12,000 |
Third-party in-product APIs | $5,000 |
Customer support & onboarding payroll (direct delivery team) | $10,000 |
Payment processing fees (3% of revenue) | $3,000 |
Delivery tools/licenses (e.g., monitoring) | $2,000 |
Total Cost of Sales (COS) | $32,000 |
Gross profit (= Revenue − COS) | $68,000 |
Gross margin (= Gross profit ÷ Revenue) | 68% |
Notes:
Don’t mix bases: If revenue is non-GAAP, CoS should be non-GAAP (with reconciliation).
Multi-product: Track CoS and margin by SKU/plan/channel; blended views can hide leakage.
Delivery costs only: Count costs that scale with serving customers this month (delivery, not sales/marketing or R&D).
Match timing: record COS in the same month as the revenue it supports.
Own servers vs. cloud: If you own servers, include their depreciation in COS; most cloud-hosted SaaS won’t.
Worked Example
Industry: SaaS
Month: March
Line item (direct to delivering the service) | Amount ($) |
|---|---|
Hosting / cloud (compute, storage, CDN) | $12,000 |
Third-party in-product APIs | $5,000 |
Customer support & onboarding payroll (direct delivery team) | $10,000 |
Payment processing fees (3% of revenue) | $3,000 |
Delivery tools/licenses (e.g., monitoring) | $2,000 |
Total Cost of Sales (COS) | $32,000 |
Gross profit (= Revenue − COS) | $68,000 |
Gross margin (= Gross profit ÷ Revenue) | 68% |
Notes:
Don’t mix bases: If revenue is non-GAAP, CoS should be non-GAAP (with reconciliation).
Multi-product: Track CoS and margin by SKU/plan/channel; blended views can hide leakage.
Delivery costs only: Count costs that scale with serving customers this month (delivery, not sales/marketing or R&D).
Match timing: record COS in the same month as the revenue it supports.
Own servers vs. cloud: If you own servers, include their depreciation in COS; most cloud-hosted SaaS won’t.
Worked Example
Industry: SaaS
Month: March
Line item (direct to delivering the service) | Amount ($) |
|---|---|
Hosting / cloud (compute, storage, CDN) | $12,000 |
Third-party in-product APIs | $5,000 |
Customer support & onboarding payroll (direct delivery team) | $10,000 |
Payment processing fees (3% of revenue) | $3,000 |
Delivery tools/licenses (e.g., monitoring) | $2,000 |
Total Cost of Sales (COS) | $32,000 |
Gross profit (= Revenue − COS) | $68,000 |
Gross margin (= Gross profit ÷ Revenue) | 68% |
Notes:
Don’t mix bases: If revenue is non-GAAP, CoS should be non-GAAP (with reconciliation).
Multi-product: Track CoS and margin by SKU/plan/channel; blended views can hide leakage.
Delivery costs only: Count costs that scale with serving customers this month (delivery, not sales/marketing or R&D).
Match timing: record COS in the same month as the revenue it supports.
Own servers vs. cloud: If you own servers, include their depreciation in COS; most cloud-hosted SaaS won’t.
Best Practices
Lock the rulebook: Publish a one-pager that lists what goes in CoS vs. OpEx, with chart-of-accounts codes and examples. Use it everywhere.
Own the close: Assign a single owner and a month-end checklist (usage accruals, vendor bills received, inventory movements, payroll splits) so CoS ties to revenue for the period.
Meter → bill → cost: For usage vendors (cloud, API, AI/ML), reconcile metered usage to invoices and book an accrual for the gap; avoid surprise gross-margin swings.
Watch unit rates: Maintain a live table of vendor rate cards (e.g., $/GB, $/txn, $/shipment). Flag increases and renegotiate early.
Segment the view: Report CoS and gross margin by product/plan, region, and channel so leakage isn’t hidden in the aggregate.
Track exceptions: Keep an “adjustments log” (credits, true-ups, incident overages) so readers can separate run-rate CoS from one-offs.
Industry checklist: Keep a short addendum per model (SaaS, e-com, marketplace, hardware, services) with the typical CoS lines you use—so new teammates classify costs consistently.
Audit trail ready: Save supporting docs (contracts, rate cards, timesheets, inventory docs) for every material CoS line.
Best Practices
Lock the rulebook: Publish a one-pager that lists what goes in CoS vs. OpEx, with chart-of-accounts codes and examples. Use it everywhere.
Own the close: Assign a single owner and a month-end checklist (usage accruals, vendor bills received, inventory movements, payroll splits) so CoS ties to revenue for the period.
Meter → bill → cost: For usage vendors (cloud, API, AI/ML), reconcile metered usage to invoices and book an accrual for the gap; avoid surprise gross-margin swings.
Watch unit rates: Maintain a live table of vendor rate cards (e.g., $/GB, $/txn, $/shipment). Flag increases and renegotiate early.
Segment the view: Report CoS and gross margin by product/plan, region, and channel so leakage isn’t hidden in the aggregate.
Track exceptions: Keep an “adjustments log” (credits, true-ups, incident overages) so readers can separate run-rate CoS from one-offs.
Industry checklist: Keep a short addendum per model (SaaS, e-com, marketplace, hardware, services) with the typical CoS lines you use—so new teammates classify costs consistently.
Audit trail ready: Save supporting docs (contracts, rate cards, timesheets, inventory docs) for every material CoS line.
Best Practices
Lock the rulebook: Publish a one-pager that lists what goes in CoS vs. OpEx, with chart-of-accounts codes and examples. Use it everywhere.
Own the close: Assign a single owner and a month-end checklist (usage accruals, vendor bills received, inventory movements, payroll splits) so CoS ties to revenue for the period.
Meter → bill → cost: For usage vendors (cloud, API, AI/ML), reconcile metered usage to invoices and book an accrual for the gap; avoid surprise gross-margin swings.
Watch unit rates: Maintain a live table of vendor rate cards (e.g., $/GB, $/txn, $/shipment). Flag increases and renegotiate early.
Segment the view: Report CoS and gross margin by product/plan, region, and channel so leakage isn’t hidden in the aggregate.
Track exceptions: Keep an “adjustments log” (credits, true-ups, incident overages) so readers can separate run-rate CoS from one-offs.
Industry checklist: Keep a short addendum per model (SaaS, e-com, marketplace, hardware, services) with the typical CoS lines you use—so new teammates classify costs consistently.
Audit trail ready: Save supporting docs (contracts, rate cards, timesheets, inventory docs) for every material CoS line.
FAQs
Is CoS the same as COGS/Cost of Revenue?
Yes—different labels, same idea. Pick one term and be consistent.Do free trials create CoS?
Yes—if you deliver service (hosting, support), those costs still hit CoS even when revenue is $0.Where do sales taxes and duties go?
Treat as pass-throughs (not CoS, not revenue) when remitted to the government.Are partner payouts/revenue-share in CoS?
If you're the principal, record gross revenue and show the payout in CoS; if an agent, report net revenue and don't show the payout in CoS.How do cloud/AI/API commitments and overages hit CoS?
Expense the period's actual usage; accrue unbilled usage; amortize prepayments over expected usage.Inventory: when do purchases hit CoS?
When sold/shipped (move from inventory to CoS using your method—FIFO/weighted-avg), not when purchased.Can depreciation be in CoS?
Yes, when tied directly to delivery (e.g., servers used to host customers, factory equipment). Otherwise it's OpEx.Should customer support payroll be in CoS?
Only the portion that delivers the contracted service (implementation/on-call). Use time splits; the rest is OpEx.
FAQs
Is CoS the same as COGS/Cost of Revenue?
Yes—different labels, same idea. Pick one term and be consistent.Do free trials create CoS?
Yes—if you deliver service (hosting, support), those costs still hit CoS even when revenue is $0.Where do sales taxes and duties go?
Treat as pass-throughs (not CoS, not revenue) when remitted to the government.Are partner payouts/revenue-share in CoS?
If you're the principal, record gross revenue and show the payout in CoS; if an agent, report net revenue and don't show the payout in CoS.How do cloud/AI/API commitments and overages hit CoS?
Expense the period's actual usage; accrue unbilled usage; amortize prepayments over expected usage.Inventory: when do purchases hit CoS?
When sold/shipped (move from inventory to CoS using your method—FIFO/weighted-avg), not when purchased.Can depreciation be in CoS?
Yes, when tied directly to delivery (e.g., servers used to host customers, factory equipment). Otherwise it's OpEx.Should customer support payroll be in CoS?
Only the portion that delivers the contracted service (implementation/on-call). Use time splits; the rest is OpEx.
FAQs
Is CoS the same as COGS/Cost of Revenue?
Yes—different labels, same idea. Pick one term and be consistent.Do free trials create CoS?
Yes—if you deliver service (hosting, support), those costs still hit CoS even when revenue is $0.Where do sales taxes and duties go?
Treat as pass-throughs (not CoS, not revenue) when remitted to the government.Are partner payouts/revenue-share in CoS?
If you're the principal, record gross revenue and show the payout in CoS; if an agent, report net revenue and don't show the payout in CoS.How do cloud/AI/API commitments and overages hit CoS?
Expense the period's actual usage; accrue unbilled usage; amortize prepayments over expected usage.Inventory: when do purchases hit CoS?
When sold/shipped (move from inventory to CoS using your method—FIFO/weighted-avg), not when purchased.Can depreciation be in CoS?
Yes, when tied directly to delivery (e.g., servers used to host customers, factory equipment). Otherwise it's OpEx.Should customer support payroll be in CoS?
Only the portion that delivers the contracted service (implementation/on-call). Use time splits; the rest is OpEx.
Related Metrics
Commonly mistaken for:
CapEx (long-term asset purchases; not delivery costs)
Operating Expenses (non-production period costs; COGS is production/service delivery)
G&A Expense (back-office overhead, not production)
Related Metrics
Commonly mistaken for:
CapEx (long-term asset purchases; not delivery costs)
Operating Expenses (non-production period costs; COGS is production/service delivery)
G&A Expense (back-office overhead, not production)
Related Metrics
Commonly mistaken for:
CapEx (long-term asset purchases; not delivery costs)
Operating Expenses (non-production period costs; COGS is production/service delivery)
G&A Expense (back-office overhead, not production)
Source of:
Index