COGS vs Operating Expenses

Cost of Goods Sold (COGS) and Operating Expenses (OpEx) represent fundamentally different types of business costs that appear separately on income statements. COGS includes direct expenses specifically tied to producing goods or services sold by a company, such as raw materials, manufacturing labour, and production equipment costs. Operating Expenses, meanwhile, cover indirect costs required to run the business that aren't directly tied to production, including administrative salaries, rent, utilities, marketing, research and development, and other overhead costs. While COGS fluctuates proportionally with sales volume, many Operating Expenses remain relatively fixed regardless of production levels.

A manufacturing company should focus on COGS when evaluating production efficiency or pricing strategies, as it directly impacts gross profit margins. For example, if a furniture manufacturer notices rising wood costs significantly increasing their COGS, they might need to adjust pricing or source alternative materials to maintain profitability. Conversely, the same company should analyze Operating Expenses when looking for organizational efficiencies or scalability. If the company's sales double but Operating Expenses increase only marginally, this indicates positive operational leverage and improving economies of scale. When assessing overall business health, companies typically examine both: COGS to understand production efficiency and OpEx to evaluate organizational efficiency, as together they provide a complete picture of cost structure across all business activities.

Cost Of Goods Sold

Operating Expenses

What is it?

The Cost Of Goods Sold (COGS) is the measure of direct costs incurred by a company to manufacture or deliver their product or service. Costs typically include raw material and direct labour, but this varies from business to business, depending on the products or services that are being sold. COGS is the building block to understanding Gross Margin and Gross Margin Percent.

Operating expenses (OPEX) are the costs a business incurs through normal operations that are not directly tied to producing goods or services. Per QuickBooks, OPEX represents the Expenses section on the Profit & Loss statement, excluding cost of goods sold (COGS) and other expenses. Common examples include sales and marketing costs, administrative salaries, and research and development expenditures.

Formula

ƒ Sum(Direct Labour Costs) + Sum(Other Direct Costs)
ƒ Sum(Operating Expenses)

Example

A SAAS based Company A has the following costs that were incurred in a month: Amazon Web Services hosting costs: $30,000 Site Reliability Engineering Salaries: 45,000 Customer Support Salaries: $10,000 Consultant hired to work on infrastructure: $5,000 The total COGS for Company A this month is: $90,000

A software company reviews its annual income statement. General and administrative expenses total $99,284; sales and marketing expenses total $334,319; research and development costs total $148,159. Adding these together gives total operating expenses of $581,762. Subtracting this figure from gross profit produces the company's operating income — the profit generated from core operations before interest and taxes.

Published and updated dates

Date created: Oct 12, 2022

Latest update: May 17, 2025

Date created: Oct 12, 2022

Latest update: Jun 26, 2026