See Also:
Manufacturing Cost
Direct Materials
Direct Labor
Overhead
Direct Cost vs. Indirect Cost

Cost of Goods Sold (COGS) Definition

Cost of Goods Sold (COGS), defined as the inventory expense that is sold to customers and is known as the largest expense to a company. It is also referred to as the Cost of Sales, and the two are used interchangeably.

Cost of Goods Sold Explained

Cost of Goods Sold, explained as being an expense, has a direct correlation with the inventory which is considered an asset. Derive the COGS equation from the inventory which will be shown later. In addition, the Cost of Sales falls right underneath the Revenue or Sales on the Income Statement. In fact, the Gross Margin is the result of Revenue minus the COGS. Also, divide the Cost of Goods Sold by Sales to find Gross Profit Margin percentage. The Gross Profit Margin percentage gives a company insight into what they need to charge for a certain product. Or they may find a component of the Cost of Goods Sold expense to reduce.

Cost of Goods Sold Formula

The formula or Cost of Goods sold equation is as follows:

Cost of Goods Sold Beginning Inventory
+ Net Purchase (raw materials, labor, and overhead)
= Cost of Goods available for sale
–  Cost of Goods Sold ending inventory
= COGS

Example

Printer Inc. sells printers and other computer components to the the general public. Peggy an accountant is in charge of the inventory and Cost of Sales as it posts to the income statement. She finds the following numbers:

Beginning Inventory = $20,000
Manufacturing or Purchase Costs = $120,000
Ending Inventory = $30,000

Then calculate the Cost of Goods Sold as follows using the formula above:

$20,000 + $120,000 = $140,000 or the Cost of Goods available for sale

$140,000 – $30,000 = $110,000 or the Cost of Goods Sold

When you know how to calculate COGS, you will better manage your company’s financials or economics. If you want to learn how you can add more value to your organization, then click here to download the Know Your Economics Worksheet.