Costs of Goods Sold

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Cost of goods sold (COGS) is the total cost a company incurs in the production of the its products

Since different products require different inputs, the exact components of COGS vary from one firm to another. COGS only includes costs directly associated with the production of a company's goods, usually costs for materials and the labor directly involved in making the product. Other, indirect costs like distribution and sales expenses are not included in COGS. Some companies use the term "Cost of Sales" instead of COGS.

COGS is displayed on the income statement and is deducted from revenue to calculate the company's gross margin.

As with many accounting metrics, there are multiple ways to calculate COGS. Generally, changes in inventory levels are used to calculate the cost of goods sold for a specific period. This is done by taking the value of a company's inventory at the beginning of the recording period, adding the cost of any production-related purchases made during that time, and then subtracting the value of the inventory at the end of the period. The result is the value (or cost) of goods sold during the given period.

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