Cost of Goods Sold (Cost of Sales)

Cost of Goods Sold (sometimes referred to as "cost of sales" or COGS) is a figure which reflects the cost of raw materials used to produce a product to sell to customers. COGS is the direct costs of producing a product for sale. It could be:

• Cost of items purchased for resale
  
• Cost of raw materials used to produce a product, or
  
• Cost of parts used to construct a product

. COGS also includes direct costs such as labor to produce the product, supplies used in manufacture or sale, shipping costs, costs of containers, freight in, and overhead costs directly related to the manufacture or production activity (like rent and utilities for the manufacturing facility).

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 ending inventory (at the end of the accounting year) $700
  
• Equals Cost of Goods Sold $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. Some businesses buy parts and assemble 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.