Cost of Goods Sold (COGS)

Definition

The cost of goods sold (COGS) or cost of sales is the direct cost that a company incurs for producing goods that it plans to sell. This generally includes the cost of raw materials, labor costs, etc. However, it excludes indirect expenses, like sales force or distribution costs.

Example

COGS is calculated as:(Beginning Inventory + Cost of Goods) – Ending Inventory. Suppose an e-commerce portal sells sports goods. To find its COGS, the company must find out its inventory value at the start of the year. The cost of producing the sports goods is added to begining inventory. Finally, the business’s ending inventory value is subtracted from the beginning value and Cost of goods.

Why it matters

COGS has a direct impact on a company's profits (revenues minus COGS = profits). Therefore, companies need to manage their COGS for ensuring better profits.

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