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Cost of Goods Sold (Cost of Sales)

By Jean Murray, About.com

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.

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