Companies will often list on their balance sheets cost of goods sold (COGS) or cost of sales (and sometimes both), leading to confusion about what the two terms mean. Fundamentally, there is almost no difference between cost of goods sold and cost of sales. In accounting, the two terms are often used interchangeably.
The Cost of Producing a Product or Service
Cost of sales (also known as cost of revenue) and COGS both track how much it costs to produce a good or service. These costs include direct labor, direct materials such as raw materials, and the overhead that's directly tied to a production facility or manufacturing plant.
Why the Cost of Sales and COGS Matter
Cost of sales and COGS are key metrics in cost analysis. Both show the operational costs that go into producing a good or service. If cost of sales is rising while revenue stagnates, this might indicate that input costs are rising, or that direct costs are not being managed properly. Cost of sales and COGS are subtracted from total revenue, thus yielding gross profit.
Companies that offer goods and services are likely to have both cost of goods sold and cost of sales appear on their income statements.
When to Use Each Term
Retailers typically use cost of sales on their balance sheets. Manufacturers use cost of goods sold. Because service-only businesses cannot directly tie operating expenses to something tangible, they cannot list any cost of goods sold on their income statements. Instead, service-only companies list cost of sales or cost of revenue. Examples of these types of businesses include attorneys, business consultants and doctors.
Some service providers offer secondary products to customers. Airlines offer food and beverages to passengers, and hotels sell souvenirs. The costs associated with these items can also be listed as cost of goods sold.
- Cost of sales and cost of goods sold (COGS) both measure what a business spends to produce a good or service.
- The terms are interchangeable and include the cost of labor, raw materials and overhead costs associated with running a production facility.
- Service providers such as attorneys use cost of sales, since service-only businesses can't list tangible items as operating expenses. An auto parts maker will use cost of goods sold.
- Both terms are key reads on profitability. Higher costs with flat revenue could mean costs are poorly managed, while higher costs and higher revenue, or flat costs and higher revenue, can imply good management.