COGS, or cost of goods sold, is a business expense and important input on an income statement that refers to the total direct costs incurred by a company to produce the goods it sells. This includes the cost of raw materials used to make the product, manufacturing overhead costs, labor costs, packaging costs, and more. COGS does not include indirect costs, fixed costs, or operating expenses, such as sales and marketing expenses. COGS can be used to calculate both a business’s gross profit and gross margin. To calculate cost of goods sold, add together the value of a company’s beginning inventory plus purchases made during that same period, then subtract its ending inventory balance.