Cost of Goods Sold (sometimes referred to as "cost of sales") is a figure which reflects the cost of raw materials used to produce a product to sell to customers. COGS, as it is sometimes called, is the direct costs of producing a product for sale. The basic calculation for Cost of Goods Sold for a retail business is:
- Beginning inventory $500
- Plus cost of goods purchased $800
- Equals goods available for sale $1300
- Less Cost of Goods sold $700
- Equals Ending Inventory $600
The calculation of COGS varies by industry. For example, a retail business buys products, marks them up, and resells them. A manufacturer buys raw materials, turns them into finished products and sells them. The calculation also depends upon whether you use FIFO (First-In, First-Out) or LIFO (Last-In-First-Out) inventory cost valuation.
Cost of Goods Sold is part of the calculation of gross revenue on your business tax form, depending on your type of business.
