# How to Calculate COGS

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COGS, or cost of goods sold, is a calculation frequently used in businesses to determine the direct expense of production of a product. The COGS includes the cost of the materials used in creating your product and also includes any labor used to get the product to market. Distribution costs and sales team costs are never included in the COGS formula. Your business' income statement will include the COGS and is deductible from your revenue to calculate your business' gross margin.

Calculate the beginning inventory number for a given period.

Add all purchases incurred during that same period.

Subtract the ending inventory number. This final calculation gives you a total amount of inventory (or cost of this inventory) during this specific period. This is your cost of goods sold.

Follow this example. If your business counts \$20 million in inventory for the determined period and makes \$4 million in purchases and ends with \$18 million in inventory, the company's cost of goods for the period would be \$6 million. The calculation is \$20 million, plus \$4 million, minus \$18 million, equals \$6 million.

#### Tips

• Hire an accountant to help you determine legal expenses or purchases.