Cost of goods sold, or COGS, is the cost assigned to goods or services recognized as sold during an accounting period. The included costs depend on the business and accounting policy but commonly cover direct materials, direct labor and allocated production costs.
How is COGS calculated for inventory?
A common periodic formula is beginning inventory + purchases and production costs − ending inventory = COGS.
Illustrative COGS calculation
| Calculation step | Amount | What it means |
|---|---|---|
| Beginning inventory | $120,000 | Inventory at the start of the period |
| Add purchases and production costs | $480,000 | Eligible costs added during the period |
| Less ending inventory | ($150,000) | Costs remaining in inventory |
| Cost of goods sold | $450,000 | $120,000 + $480,000 − $150,000 |
The example is illustrative. Inventory valuation method, freight treatment, overhead allocation and write-downs can change the result.
COGS vs. operating expenses
COGS is directly associated with the goods or services sold. Operating expenses support the wider business. Classification follows the accounting policy and should remain consistent when comparing margins.
How is COGS used?
Revenue minus COGS produces gross profit. Teams also use COGS for inventory valuation, pricing and variance analysis, but a product decision may require additional variable costs outside the accounting COGS definition.
