Introduction to Cost of Goods Sold
Cost of Goods Sold or as it is more popularly known, COGS is the cost of the material and labor that goes into the production of the goods. This does not involve other costs like the cost of distribution or the sales force costs and solely refers to the cost of the production of goods. This Cost of sold goods can be also referred to as the cost of sales.
What is the Cost of Goods Sold or COGS?
The costs required to make the goods is what we call the cost of goods sold or the cost of goods services or the cost of sales. In a more simple language, COGS is basically how much money you spent to produce the products or services of your business.
This involves all the material as well as the labour that was required to produce the goods. It should only include the costs that were involved in producing the services and providing them and should not include the costs of services or products that you produce for your own use and do not sell.
Cost of goods sold also excludes all the indirect costs like the marketing expenses, distribution costs, shipping expenses, etc.
It is very important to keep a record of COGS as the final COGS or cost of sold goods is subtracted from the company’s revenue and therefore, is an important metric to measure the company’s gross profit.
If the cost of goods sold is high then it shows that the company’s net income is less and as a result the profit is less. So, the companies try to keep the COGS low. COGS is also used by analysts and investors to check the company’s position in the market.
What is the Formula to calculate Cost of Goods Sold or COGS?
Just like any other financial metric, COGS also has a formula which can be used for its calculation. The formula is as follows:
COGS = Beginning Inventory + Purchases during the period − Ending Inventory Where, COGS = Cost of Goods Sold Beginning inventory is the amount of inventory left over a previous period. It can be a month, quarter, etc. Purchases during the period involve the cost of what you purchased during the accounting period. Ending inventory is the inventory which you did not sell during the period.
Once you have all the values needed, you can put them in the formula to calculate the COGS.
