Cost of Goods Sold (COGS)

Cost of goods sold is the direct cost of producing whatever the company sells: raw materials, factory labor, freight in, manufacturing overhead. It excludes the cost of running the company around the product — sales teams, R&D, and head office land in operating expenses instead.

COGS is the line that defines gross profit, and the direct-versus-indirect boundary is where comparability lives. A software company's COGS is mostly hosting and support, which is why software gross margins run 70-90% while an automaker's sit near 15-20%: the product costs almost nothing to replicate versus a machine built from $30,000 of parts and labor.

Classification is partly judgment. Two companies in the same industry can allocate the same warehouse costs differently, so check the footnotes before comparing gross margins line to line.