Cost of Goods Sold (COGS): Definition, Meaning & Guide for Indian Businesses

COGS is the direct cost of producing goods sold — materials, direct labour, factory overhead. Revenue - COGS = gross profit. Critical for understanding unit economics.

What is Cost of Goods Sold (COGS)?

Cost of Goods Sold (COGS) includes only DIRECT costs of producing what you sold — raw materials, packaging, direct labour, factory power, freight in. Excludes: salaries of admin/sales staff, marketing, rent, depreciation of non-production assets. Formula: opening inventory + purchases - closing inventory. For services: cost of direct delivery (consultant salary, software subscriptions used directly). Gross profit = Revenue - COGS. Gross margin = Gross profit ÷ Revenue. Indian SMB benchmarks: 30-40% for trading, 50-70% for SaaS, 20-30% for low-tech manufacturing.