COGS refers to the direct costs of producing the goods sold by a company. This amount includes the cost of the materials and labor directly used to create the good. It excludes indirect expenses, such as distribution costs and sales force costs.

COGS is deducted from your gross receipts (revenue) to calculate your gross profit. Because it directly lowers your reported gross profit, an accurate and fully maximized COGS calculation directly reduces your taxable income, saving you money during tax season.

No. Marketing, advertising, rent for a retail storefront, and administrative salaries are considered Operating Expenses (OpEx). COGS strictly includes costs that are directly tied to the production or acquisition of the specific items you are selling.

Service businesses usually calculate a "Cost of Revenue" or "Cost of Services" instead of traditional COGS. This includes the direct wages paid to employees fulfilling the service, subcontractor fees for the project, and direct software licenses required solely for that client.

Yes. "Freight-In" (the cost to ship raw materials or wholesale products to your facility) is a direct cost of acquiring the inventory and should be added to your COGS. (Note: "Freight-Out" or shipping products to your customer is usually tracked as an operating delivery expense).

You only deduct the cost of goods that were *actually sold* during the period. If you bought $10,000 in product but $4,000 is still sitting on your shelf at the end of the year (Ending Inventory), you can only claim the $6,000 that left your store as COGS for that period.