How to Calculate Cost of Goods Sold (COGS)

As a business owner, it is important to understand the financial metrics that drive your business. One such metric is the cost of goods sold (COGS). In this article, we will define what COGS is, what costs are included in COGS, and how to calculate it using the COGS formula.

Cost of goods sold is an important financial metric that represents the direct costs of producing and selling a product. COGS is an important metric for businesses because it is used to calculate the gross profit margin, which is the difference between the revenue generated from sales and the cost of goods sold.

What is Cost of Goods Sold (COGS)?

COGS represents the direct costs associated with producing and selling a product. These costs include the cost of raw materials, direct labor costs, and any other costs directly associated with the production of the product. COGS does not include indirect costs such as marketing and advertising expenses, rent, or utilities.

What costs are included in Cost of Goods Sold (COGS)?

As mentioned, COGS includes the direct costs of producing and selling a product. This includes the

• Cost of raw materials
• Direct labour costs
• Any other costs directly associated with the production of the product.

Raw materials are the materials that are used in the production of the product. This includes the cost of materials such as wood, metal, plastic, and any other materials that are used to make the product. Direct labor costs are the costs associated with the workers who are directly involved in the production of the product. This includes wages, salaries, and any benefits that are paid to these workers.

Other costs that are directly associated with the production of the product may include equipment costs, packaging, and shipping costs. These costs can vary depending on the type of product being produced and the production process.

How to Calculate Cost of Goods Sold (COGS)

To calculate COGS, you will need to know the cost of raw materials, direct labor costs, and any other costs directly associated with the production of the product. Once you have this information, you can use the COGS formula to calculate the cost of goods sold.

COGS Formula and Calculation Example

The COGS formula is:

COGS = Beginning Inventory + Purchases – Ending Inventory

Let’s say you own a furniture manufacturing company. At the beginning of the year, you had an inventory of raw materials worth $50,000. Throughout the year, you purchased additional raw materials worth $100,000. At the end of the year, you had an inventory of raw materials worth $20,000.

To calculate your COGS, you would use the following formula:

COGS = $50,000 + $100,000 – $20,000

In this example, your COGS would be $130,000.

Conclusion and Next Steps

In conclusion, the cost of goods sold is an important financial metric that represents the direct costs associated with producing and selling a product. COGS is used to calculate the gross profit margin, which is the difference between the revenue generated from sales and the cost of goods sold. To calculate COGS, you will need to know the cost of raw materials, direct labor costs, and any other costs directly associated with the production of the product.

Now that you understand what COGS is and how to calculate it, you can use this information to make informed business decisions. By tracking your COGS, you can identify areas where you can reduce costs and improve your profit margin.