Cost of Goods Sold (COGS)

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Avinash Patil

Remi Cossart

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.

--COGS Example-- is the costs that go into creating the products that a company sells; therefore, the only costs included in the measure are those that are directly tied to the production of the products. For example, the COGS for an automaker would include the material costs for the parts that go into making the car along with the labor costs used to put the car together. The cost of sending the cars to dealerships and the cost of the labor used to sell the car would be excluded.

The exact costs included in the COGS calculation will differ from one type of business to another.

The cost of goods attributed to a company's products are expensed as the company sells these goods. There are several ways to calculate COGS but one of the more basic ways is to start with the beginning inventory for the period and add the total amount of purchases made during the period then deducting the ending inventory. This calculation gives the total amount of inventory or, more specifically, the cost of this inventory, sold by the company during the period. Therefore, if a company starts with $10 million in inventory, makes $2 million in purchases and ends the period with $9 million in inventory, the company's cost of goods for the period would be $3 million ($10 million + $2 million - $9 million).

It altenatively also know as Cost of Sales, if one includes the Sale Expenses