That can lead to companies being tempted to keep their COGS as low as possible, in an effort to bolster their gross profit. There are a number of theories on what should be included in COGS for software, but not everyone agrees. There are no obvious direct costs in relation to SaaS, especially if it’s a subscription for a license of software that is cloud-based. ![]() For product-based businesses, that doesn’t really matter, as it’s usually pretty clear which items the company has spent money on that directly relate to creating the product, like materials, labor, and delivery costs.įor SaaS businesses, things become a lot more murky. ![]() Unfortunately, there is no generally accepted accounting practice (GAAP) when it comes to calculating COGS. Therefore, direct costs of production are included, but business operational costs aren’t. Fundamentally, it’s calculated to identify exactly how much a business has to spend to create the product or service that they sell. But if you don’t produce a physical product, is COGS still a useful metric? What is COGS?ĬOGS stands for cost of goods sold, sometimes also known just as cost of sales. If the cost of creating what you sell is more than what you charge for it, you’re in trouble. ![]() Traditionally, COGS, or cost of goods sold, has been used as an indicator of how well a business is performing, particularly in relation to its operational efficiency.
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