The Procurement Glossary » Cost of Goods Sold (COGS)

Cost of Goods Sold (COGS)

Finance & Payments

Also known as: COGS

Definition

The direct costs of producing the goods a company sells, including direct materials and labour.

Explanation

Direct procurement spend flows straight into COGS, so sourcing savings on materials directly improve gross margin. This tight link is why direct-spend categories get intense cost focus.

Example

A 5% cut in raw-material cost lifts gross margin by reducing COGS.

Related terms

• Direct Spend — Spend on goods and services that go directly into the products a company makes or sells.
• Purchase Price Variance (PPV) — The difference between the actual price paid for an item and its standard or expected price.
• Cost Breakdown — An itemised disclosure of the components that make up a supplier's price, such as materials, labour, freight, overhead and margin.
• Cost Savings — A reduction in the price or cost of a purchase compared with a baseline, delivered through sourcing or negotiation.

Frequently Asked Questions

What is Cost of Goods Sold (COGS)?

The direct costs of producing the goods a company sells, including direct materials and labour. Direct procurement spend flows straight into COGS, so sourcing savings on materials directly improve gross margin. This tight link is why direct-spend categories get intense cost focus.

Can you give an example of Cost of Goods Sold (COGS)?

A 5% cut in raw-material cost lifts gross margin by reducing COGS.

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