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.
Hire an accountant to help you determine legal expenses or purchases.
- Cabrillo College: Identify and Estimate Operating Cost
- Internal Revenue Service. "Publication 538: Accounting Periods and Methods," Pages 13-15. Accessed July 22, 2020.
- Internal Revenue Service. "Deducting Business Expenses." Accessed July 22, 2020.
- Internal Revenue Service. "Publication 334: Tax Guide for Small Business," Page 27. Accessed July 22, 2020.
- JCPenney. "2016 Form 10-K," Page 38. Accessed July 22, 2020.
- JCPenney. "2016 Form 10-K," Page 55. Accessed July 22, 2020.
- Hire an accountant to help you determine legal expenses or purchases.
A journalism graduate from Temple University, Saylor Connors has been a contributing food and travel editor to a digital media company for the past five years. Today, with her husband, a commercial pilot, Connors travels the world and teaches international cooking classes in her spare time.