COS is the usual abbreviation for cost of sales, the direct cost of the goods or services a business sold during a period. In a service firm the same letters often stand for cost of services, which covers the direct labor and other costs of delivering those services. Either way, COS is shown on the income statement directly below revenue.
COS, COGS and gross profit
For a merchandiser or manufacturer, COS means essentially the same thing as cost of goods sold (COGS), and the two labels are used interchangeably in many annual reports. Retailers calculate it from inventory records: beginning inventory plus net purchases, minus ending inventory. A manufacturer includes direct materials, direct labor and applied manufacturing overhead for the units sold.
Service businesses have no inventory, so their cost of services is built from the costs that vary with the work done, such as the salaries of consultants assigned to client projects, subcontractor fees and materials used on jobs. Selling and administrative costs stay outside COS and are reported as operating expenses.
Subtracting COS from net revenue gives gross profit. A company with revenue of $500,000 and COS of $320,000 has gross profit of $180,000, or a gross margin of 36 percent. Because the boundary between COS and operating expenses involves judgment, companies should apply it consistently from year to year.