It’s important for any business owner or entrepreneur to understand how to calculate the Cost of Goods Sold (COGS).
COGS represents the direct costs involved in producing or purchasing the products you sell. It’s one of the most important numbers on your income statement because it directly impacts your gross profit and overall profitability.
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🙋 What is COGS?
COGS includes the cost of materials and labor directly used to create the product. It does not include indirect expenses like marketing or distribution.
🧮 Formula to Calculate COGS
The basic formula is:
COGS = Beginning Inventory + Purchases – Ending Inventory
Where:
- Beginning Inventory is the value of the inventory at the start of the period
- Purchases is the cost of inventory bought during the period
- Ending Inventory is the value of inventory left at the end of the period
💡 Why COGS is Important
- It directly affects gross profit
- Helps determine product pricing
- Important for tax reporting
- Essential in analyzing business efficiency
📋 Example
Let’s say:
- Beginning Inventory = $5,000
- Purchases = $10,000
- Ending Inventory = $4,000
Then,
COGS = 5000 + 10000 – 4000 = $11,000
✅ Quick Tips
- Always include only direct costs (raw materials, labor)
- Exclude overhead costs like rent or utilities
- Track inventory regularly to keep COGS accurate
- Use accounting software to automate calculations