COGS Definition

Cost Of Goods Sold - the directly attributable costs of selling the product

Cost Of Goods Sold (COGS) is the cost of the product that has been sold. So, this includes the costs of any materials used to create the product, salaries of employees and indirect costs such as office space and any third party licences that must be paid. For a typical software product, think about:

  • Costs to build the product (e.g. salaries of the development team)
  • Costs related to third party licences used within the product
  • Any costs associated with distributing the product (e.g. box, packaging costs if COTS)
  • Costs associated with selling the product (e.g. salaries of sales and marketing team)

Calculating COGS is useful when looking at product profitability and to check that the cost of producing your product is not increasing over time. Ideally, the cost should reduce as less effort is required to produce new software.

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