In many organizations, especially those that offer digital products or services, content and software development costs are often associated with cost of goods sold (COGS). The classification of these costs as COGS depends on their direct contribution to revenue generation. For example, development efforts associated with the creation of a specific software module or digital content that directly supports a subscription or licensing fee are typically considered COGS.

This classification provides a more accurate reflection of gross margin by aligning revenue with its associated costs. However, development activities that enhance long-term capabilities or are not tied to a specific revenue stream are typically classified as capital or operating expenses. This distinction is critical for financial transparency and strategic resource allocation, as it affects profitability assessments and investor perceptions of operational performance.

What is COGS?

The direct expenses involved in creating the goods or services that a business sells over a given time period are referred to as COGS (Cost Of Goods Sold). Raw materials, direct labor, and any other expenses directly associated with production are usually included in these prices. Costs directly associated with providing the service, including software development or hosting expenses, may also be included in COGS for a service-based business. Pricing plans, financial research, and guaranteeing the long-term viability of the company all depend on an understanding of COGS.

Content and Software Development in Different Contexts

1. SaaS Companies

SaaS(Software-as-a-Service) companies offer COGD costs directly related to maintaining and running the software development platform, such as:

• Salaries of engineers working on deployed features.
• Cloud hosting and server expenses.
• Licences for tools or libraries directly integrated into the product.

2. Content Production Businesses

Media companies, streaming platforms, and publishers often have hefty content creation budgets. Costs for producing content that is sold or monetized as:

• Production expenses for a TV series on a streaming service.
• Fees paid to writers, designers, or video editors for premium, subscriber-only content.

3. E-Commerce and Digital Products

For businesses selling software licences or digital content downloads, the distinction is similar.

• Costs for developing the software or content that is immediately sold.
• Maintenance and updates for an existing software product.
• Development of future product versions or updates.

When Should Development Costs Be Capitalised?

In some cases, content or software development costs aren’t expensed immediately; they are capitalised and spread out over time through amortisation.

Example: A SaaS company developing a major platform overhaul may capitalise those costs during development and then treat the amortised expense as part of COGS after the product is live.

This approach aligns with accounting standards like GAAP and IFRS, which allow capitalization when costs meet specific criteria (e.g., technical feasibility, intent to complete, and future economic benefit).

Steps to Classify Costs in Content and Software development

Understand the Purpose:

Are the costs directly tied to delivering your product or service?

If yes, they likely belong in COGS. If not, they may fall under OpEx or need to be capitalised.

Consult Accounting Standards:

For software companies, ASC 985-20 (GAAP) and IAS 38 (IFRS) offer guidance on software capitalization and expense treatment.

Work with Finance Experts:

Especially for businesses with complex operations, a financial advisor or CPA can ensure proper classification.

Why COGS Matters in Content and Software Development?

COGS plays a critical role in content and software development. In these industries, expenses such as hosting services, licensing fees, developer salaries for specific projects, and content creation costs are often included in COGS if they are tied to the delivery of a product or service. Accurately identifying COGS helps companies determine the true cost of delivering their software or digital content, enabling better pricing strategies and gross margin analysis.

It also supports informed decision-making about scaling operations, managing costs, or investing in innovation. For content and software companies, tracking COGS ensures a transparent view of operational performance and financial health, especially in competitive markets.

Final Thoughts

Deciding whether content and software development costs get “baked into COGS” is not a one-size-fits-all answer. It depends on how directly these costs contribute to the revenue-generating product or service. For businesses in digital industries, understanding this distinction isn’t just about financial accuracy—it’s a strategic decision that affects profitability, reporting, and growth.