As there is no inventory to worry about, cost of revenue can and often does include costs which are incurred after the sale has been made such as carriage costs to the customer or credit card charges. So for example, freight in costs for transporting the goods from the supplier to the business are incurred prior to sale and are included in the inventory or cost of goods sold costs, but carriage costs from the business to a customer are incurred after the sale has been made, and are not included in inventory or cost of goods sold.įor a business which does not hold inventory of a physical product such as a service based business the term cost of sales or cost of revenue is often used. It is for this reason that the costs of goods sold only ever includes costs which formed part of the inventory prior to being sold. When the products are eventually sold, the same costs are transferred from inventory to the cost of goods sold. It is important to understand that until the products are sold, the costs of manufacturing or purchasing them form part of the inventory of the business. If there are no sales, then there will be no cost of goods sold. The term cost of goods sold or COGS for short, is used by a business which holds inventory such as a manufacturer, retailer or wholesaler to refer to the total of the direct costs associated with producing, manufacturing, or obtaining the products which have been sold during the year.
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