Cost of Sales
Industry:
Market-Wide
Efficiency
Profitability
Aliases:
Back to Metric-dictionary
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 S&M, R&D, and G&A.
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 S&M, R&D, and G&A.
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 S&M, R&D, and G&A.
Why it matters for Investors
True unit economics: CoS sits directly against Revenue → drives Gross Profit and Gross Margin.
Comparability: Clear CoS policy lets investors compare margins across companies and models.
Cost control: Highlights variable drivers (materials, freight, cloud, processing fees) you can optimize.
Why it matters for Investors
True unit economics: CoS sits directly against Revenue → drives Gross Profit and Gross Margin.
Comparability: Clear CoS policy lets investors compare margins across companies and models.
Cost control: Highlights variable drivers (materials, freight, cloud, processing fees) you can optimize.
Why it matters for Investors
True unit economics: CoS sits directly against Revenue → drives Gross Profit and Gross Margin.
Comparability: Clear CoS policy lets investors compare margins across companies and models.
Cost control: Highlights variable drivers (materials, freight, cloud, processing fees) you can optimize.
Formula
Inventory Businesses (Classic View)
Services/ Software View (Policy Driven)
Practical considerations -
Be explicit: Write a one-pager: what’s in CoS vs OpEx (Sales and Marketing Expense, Research and Development Expense, General and Administrative Expense).
Match revenue basis: If revenue is gross (includes pass-throughs), include matching pass-through costs in CoS; if net, don’t double count.
Delivery-linked people costs: Support/implementation required to deliver SLAs can sit in CoS (per policy); otherwise OpEx.
Marketplaces/fintech: Partner payouts, chargebacks, fraud losses, payment fees are typically CoS when you’re principal.
Cloud/AI usage: Hosting, CDN, usage-based API/token costs that scale with customers belong in CoS.
Consistency: Don’t flip between GAAP and “adjusted” without a clear reconciliation.
Formula
Inventory Businesses (Classic View)
Services/ Software View (Policy Driven)
Practical considerations -
Be explicit: Write a one-pager: what’s in CoS vs OpEx (Sales and Marketing Expense, Research and Development Expense, General and Administrative Expense).
Match revenue basis: If revenue is gross (includes pass-throughs), include matching pass-through costs in CoS; if net, don’t double count.
Delivery-linked people costs: Support/implementation required to deliver SLAs can sit in CoS (per policy); otherwise OpEx.
Marketplaces/fintech: Partner payouts, chargebacks, fraud losses, payment fees are typically CoS when you’re principal.
Cloud/AI usage: Hosting, CDN, usage-based API/token costs that scale with customers belong in CoS.
Consistency: Don’t flip between GAAP and “adjusted” without a clear reconciliation.
Formula
Inventory Businesses (Classic View)
Services/ Software View (Policy Driven)
Practical considerations -
Be explicit: Write a one-pager: what’s in CoS vs OpEx (Sales and Marketing Expense, Research and Development Expense, General and Administrative Expense).
Match revenue basis: If revenue is gross (includes pass-throughs), include matching pass-through costs in CoS; if net, don’t double count.
Delivery-linked people costs: Support/implementation required to deliver SLAs can sit in CoS (per policy); otherwise OpEx.
Marketplaces/fintech: Partner payouts, chargebacks, fraud losses, payment fees are typically CoS when you’re principal.
Cloud/AI usage: Hosting, CDN, usage-based API/token costs that scale with customers belong in CoS.
Consistency: Don’t flip between GAAP and “adjusted” without a clear reconciliation.
Worked Example
Line Item | Amount | Notes |
|---|---|---|
Inventory/ Bill of Materials (or BOM) | $18,500,000 | Product Cost |
Inbound Freight | (in BOM) | Included above |
Warehousing/ Packaging/ Returns | $3,000,000 | Fulfilment & reverse logistics |
Third-party APIs/ Processing | $1,000,000 | Payments/data/API tied to delivery |
Total Cost of Sales | $22,500,000 | =$18.5M + $3M + $1M |
Revenue | $50,000,000 | GAAP or policy-consistent |
Gross Profit | $27,500,000 | Revenue - Cost of Sales |
Gross Margin (%) | 55% | ($27.5M ÷ $50.0M) × 100 |
Notes:
Don’t mix bases: If revenue is non-GAAP, CoS should be non-GAAP (with reconciliation).
Pass-throughs: If you gross up revenue, include matching pass-through costs in CoS (or report net).
Multi-product: Track CoS and margin by SKU/plan/channel; blended views can hide leakage.
Worked Example
Line Item | Amount | Notes |
|---|---|---|
Inventory/ Bill of Materials (or BOM) | $18,500,000 | Product Cost |
Inbound Freight | (in BOM) | Included above |
Warehousing/ Packaging/ Returns | $3,000,000 | Fulfilment & reverse logistics |
Third-party APIs/ Processing | $1,000,000 | Payments/data/API tied to delivery |
Total Cost of Sales | $22,500,000 | =$18.5M + $3M + $1M |
Revenue | $50,000,000 | GAAP or policy-consistent |
Gross Profit | $27,500,000 | Revenue - Cost of Sales |
Gross Margin (%) | 55% | ($27.5M ÷ $50.0M) × 100 |
Notes:
Don’t mix bases: If revenue is non-GAAP, CoS should be non-GAAP (with reconciliation).
Pass-throughs: If you gross up revenue, include matching pass-through costs in CoS (or report net).
Multi-product: Track CoS and margin by SKU/plan/channel; blended views can hide leakage.
Worked Example
Line Item | Amount | Notes |
|---|---|---|
Inventory/ Bill of Materials (or BOM) | $18,500,000 | Product Cost |
Inbound Freight | (in BOM) | Included above |
Warehousing/ Packaging/ Returns | $3,000,000 | Fulfilment & reverse logistics |
Third-party APIs/ Processing | $1,000,000 | Payments/data/API tied to delivery |
Total Cost of Sales | $22,500,000 | =$18.5M + $3M + $1M |
Revenue | $50,000,000 | GAAP or policy-consistent |
Gross Profit | $27,500,000 | Revenue - Cost of Sales |
Gross Margin (%) | 55% | ($27.5M ÷ $50.0M) × 100 |
Notes:
Don’t mix bases: If revenue is non-GAAP, CoS should be non-GAAP (with reconciliation).
Pass-throughs: If you gross up revenue, include matching pass-through costs in CoS (or report net).
Multi-product: Track CoS and margin by SKU/plan/channel; blended views can hide leakage.
Best Practices
Fix the rulebook: Publish what counts in Revenue and what sits in CoS; use it everywhere.
Keep delivery costs in CoS: Materials/BOM, inbound freight, fulfilment, hosting/CDN, payment fees, third-party APIs.
Update unit costs monthly: True-up inventory and returns/warranty reserves; refresh cloud rate cards and usage.
Segment the view: Report CoS and margin by product, segment, channel, region.
Show % and dollars: Publish Gross Profit ($) and Gross Margin (%); monitor incremental margin on new revenue.
Label adjustments: If you present “Adjusted” CoS or margin, define adjustments and reconcile to GAAP.
Best Practices
Fix the rulebook: Publish what counts in Revenue and what sits in CoS; use it everywhere.
Keep delivery costs in CoS: Materials/BOM, inbound freight, fulfilment, hosting/CDN, payment fees, third-party APIs.
Update unit costs monthly: True-up inventory and returns/warranty reserves; refresh cloud rate cards and usage.
Segment the view: Report CoS and margin by product, segment, channel, region.
Show % and dollars: Publish Gross Profit ($) and Gross Margin (%); monitor incremental margin on new revenue.
Label adjustments: If you present “Adjusted” CoS or margin, define adjustments and reconcile to GAAP.
Best Practices
Fix the rulebook: Publish what counts in Revenue and what sits in CoS; use it everywhere.
Keep delivery costs in CoS: Materials/BOM, inbound freight, fulfilment, hosting/CDN, payment fees, third-party APIs.
Update unit costs monthly: True-up inventory and returns/warranty reserves; refresh cloud rate cards and usage.
Segment the view: Report CoS and margin by product, segment, channel, region.
Show % and dollars: Publish Gross Profit ($) and Gross Margin (%); monitor incremental margin on new revenue.
Label adjustments: If you present “Adjusted” CoS or margin, define adjustments and reconcile to GAAP.
FAQs
Do shipping and payment fees go in CoS?
If they’re required to deliver the order/service, yes.Is customer support in CoS?
If it’s needed to deliver contracted SLAs (implementation, on-call support), it can be CoS per policy; otherwise OpEx.Are R&D and Sales & Marketing in CoS?
No. They’re OpEx.Where do cloud/AI/API usage costs go?
In CoS if they scale with customer delivery (hosting/CDN, model inference, data/API fees).Marketplaces: partner payout in CoS or netted?
If you’re principal, record gross revenue and show the payout in CoS. If agent, report net revenue (your take) and don’t add the payout to CoS.Can CoS include depreciation?
Yes, when tied to production/delivery assets (e.g., factory equipment, capitalized software run costs). Otherwise depreciation sits in OpEx.
FAQs
Do shipping and payment fees go in CoS?
If they’re required to deliver the order/service, yes.Is customer support in CoS?
If it’s needed to deliver contracted SLAs (implementation, on-call support), it can be CoS per policy; otherwise OpEx.Are R&D and Sales & Marketing in CoS?
No. They’re OpEx.Where do cloud/AI/API usage costs go?
In CoS if they scale with customer delivery (hosting/CDN, model inference, data/API fees).Marketplaces: partner payout in CoS or netted?
If you’re principal, record gross revenue and show the payout in CoS. If agent, report net revenue (your take) and don’t add the payout to CoS.Can CoS include depreciation?
Yes, when tied to production/delivery assets (e.g., factory equipment, capitalized software run costs). Otherwise depreciation sits in OpEx.
FAQs
Do shipping and payment fees go in CoS?
If they’re required to deliver the order/service, yes.Is customer support in CoS?
If it’s needed to deliver contracted SLAs (implementation, on-call support), it can be CoS per policy; otherwise OpEx.Are R&D and Sales & Marketing in CoS?
No. They’re OpEx.Where do cloud/AI/API usage costs go?
In CoS if they scale with customer delivery (hosting/CDN, model inference, data/API fees).Marketplaces: partner payout in CoS or netted?
If you’re principal, record gross revenue and show the payout in CoS. If agent, report net revenue (your take) and don’t add the payout to CoS.Can CoS include depreciation?
Yes, when tied to production/delivery assets (e.g., factory equipment, capitalized software run costs). Otherwise depreciation sits in OpEx.
Related Metrics
Parents: Revenue
Components by Industry:
Physical Goods / E-Commerce: Materials / Bill of Materials (BOM); Manufacturing / assembly costs: Inbound freight & duties (to receive inventory): Warehousing, pick/pack, outbound shipping; Delivery personnel payroll (if directly tied to order fulfillment); Packaging & supplies; Warranty, returns & reverse logistics provisions
Software / SaaS: Hosting / cloud / CDN; Third-party APIs / data fees (including AI inference); Payment processing fees (card, ACH, wallets); Customer support / implementation labor required to meet SLAs (policy dependent); Amortization of capitalized software used in delivery
Marketplaces / Logistics: Partner payouts / courier costs (if acting as principal); Insurance & claims related to delivery; Chargebacks & fraud losses (policy dependent); Transaction processing & settlement costs
Fintech / Payments: Interchange / network fees; Payment processor charges; Fraud, chargeback & loss provisions
Commonly mistaken for: Operating Expenses (Sales and Marketing Expense, Research and Development Expense, General and Administrative Expense), Total Variable Costs, Total Fixed Costs
Related Metrics
Parents: Revenue
Components by Industry:
Physical Goods / E-Commerce: Materials / Bill of Materials (BOM); Manufacturing / assembly costs: Inbound freight & duties (to receive inventory): Warehousing, pick/pack, outbound shipping; Delivery personnel payroll (if directly tied to order fulfillment); Packaging & supplies; Warranty, returns & reverse logistics provisions
Software / SaaS: Hosting / cloud / CDN; Third-party APIs / data fees (including AI inference); Payment processing fees (card, ACH, wallets); Customer support / implementation labor required to meet SLAs (policy dependent); Amortization of capitalized software used in delivery
Marketplaces / Logistics: Partner payouts / courier costs (if acting as principal); Insurance & claims related to delivery; Chargebacks & fraud losses (policy dependent); Transaction processing & settlement costs
Fintech / Payments: Interchange / network fees; Payment processor charges; Fraud, chargeback & loss provisions
Commonly mistaken for: Operating Expenses (Sales and Marketing Expense, Research and Development Expense, General and Administrative Expense), Total Variable Costs, Total Fixed Costs
Related Metrics
Parents: Revenue
Components by Industry:
Physical Goods / E-Commerce: Materials / Bill of Materials (BOM); Manufacturing / assembly costs: Inbound freight & duties (to receive inventory): Warehousing, pick/pack, outbound shipping; Delivery personnel payroll (if directly tied to order fulfillment); Packaging & supplies; Warranty, returns & reverse logistics provisions
Software / SaaS: Hosting / cloud / CDN; Third-party APIs / data fees (including AI inference); Payment processing fees (card, ACH, wallets); Customer support / implementation labor required to meet SLAs (policy dependent); Amortization of capitalized software used in delivery
Marketplaces / Logistics: Partner payouts / courier costs (if acting as principal); Insurance & claims related to delivery; Chargebacks & fraud losses (policy dependent); Transaction processing & settlement costs
Fintech / Payments: Interchange / network fees; Payment processor charges; Fraud, chargeback & loss provisions
Commonly mistaken for: Operating Expenses (Sales and Marketing Expense, Research and Development Expense, General and Administrative Expense), Total Variable Costs, Total Fixed Costs
Back to Metric-dictionary
Index