Here’s Everything You Need To Know About Cost Of Goods Sold

What Does The Term Cost Of Goods Sold (COGS) Mean?

Cost of Goods Sold (COGS), often referred to as cost of sales or cost of revenue, is an accounting term that represents the direct costs incurred by a business to produce or acquire the goods it sells during a specific accounting period.

It includes all expenses associated with the production or purchase of goods that are intended for resale. These costs are subtracted from a company’s total revenue to calculate its gross profit.

How Do You Calculate COGS?

It is calculated by adding up all the direct costs associated with the production or acquisition of the goods that a company sells during a specific accounting period. 

COGS = Opening Inventory + Purchases (or Cost of Production) – Closing Inventory

Opening Inventory represents the value of goods a company had on hand at the beginning of the accounting period.

Purchases or Cost of Production refers to the cost of additional inventory acquired or produced during the period.

Closing Inventory is the value of the inventory remaining at the end of the accounting period.

By subtracting the closing inventory from the sum of the opening inventory and purchases (or cost of production), one can determine the cost of goods sold.

What Is An Example Of COGS?

Let’s say you run a retail clothing store. At the beginning of the month, you had $10,000 worth of clothing inventory in stock (opening inventory). During the month, you purchased $5,000 worth of new clothing inventory (purchases), and at the end of the month, you had $3,000 worth of clothing inventory left (closing inventory).

Using the COGS formula: COGS = $10,000 (opening inventory) + $5,000 (purchases) – $3,000 (closing inventory) COGS = $12,000

In this example, your cost of goods sold for the month is $12,000, which represents the cost of clothing items that you sold during that period.

Is COGS An Expense?

Yes, COGS is considered an expense on a company’s income statement. It is an operating expense that represents the direct costs associated with the production or acquisition of the goods a company sells.

COGS is subtracted from a company’s total revenue to calculate its gross profit, which is the profit generated before deducting other operating expenses and taxes.