Cost of Goods Sold

Cost of goods sold (COGS) refers to 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. The COGS are the direct costs that are attributable to the production of the goods sold by a company. COGS are also referred to the inventory costs of the goods a business has sold during a particular period.

The COGS directly includes the cost of the materials used in creating the good along with the direct labor costs used to produce the good. The COGS does not include indirect expenses like distribution costs. It is also known as cost of sales.  The cost of goods sold is an income statement which includes the cost of obtaining raw materials and producing finished goods that are sold to consumers. The gross margin is calculated by deducting the COGS from total sales. The formula to calculate COGS is

Cost of Goods Sold = Beginning Merchandise Inventory + Net Purchases - Ending Merchandise Inventory.

The cost of goods sold of company’s products is expensed as the company sells these goods. COGS can be calculated in many ways. The basic way to calculate is by starting with the beginning inventory for the period and add the total amount of purchases made during the period then deducting the ending inventory. This gives the total amount of inventory which is the cost of this inventory, sold by the company during the period.

Let us consider that the beginning inventory is Rs. 1, 50,000; net purchases is

Rs. 4, 00,000 and the ending inventory is Rs. 1, 25,000; then COGS is

COGS= 1, 50,000+4, 00,000-1, 25,000 = Rs. 4, 25,000

A company should focus on reducing or maintaining in its cost of goods sold while aiming to increase it profits. This would enable the company on a financial well being.