Cost Of Goods Sold - COGS

Loading the player...

What is 'Cost Of Goods Sold - COGS'

Cost of goods sold (COGS) are the direct costs attributable to the production of the goods sold by a company. This amount includes the cost of the materials used in creating the good along with the direct labor costs used to produce the good. It excludes indirect expenses such as distribution costs and sales force costs. COGS appears on the income statement and can be deducted from revenue to calculate a company's gross margin. Also referred to as "cost of sales."

BREAKING DOWN 'Cost Of Goods Sold - COGS'

COGS is the cost of creating the products that a company sells; therefore, the only costs included in the measure are those that are directly tied to the production of the products.

For example, the COGS for an automaker would include the material costs for the parts that go into making the car along with the labor costs used to put the car together. The cost of sending the cars to dealerships and the cost of the labor used to sell the car would be excluded.

The exact costs included in the COGS calculation will differ from one type of business to another. The cost of goods attributed to a company's products are expensed as the company sells these goods. There are several ways to calculate COGS but one of the more basic ways is to start with the beginning inventory for the period and add the total amount of purchases made during the period, and then deducting the ending inventory. This calculation gives the total amount of inventory or, more specifically, the cost of this inventory, sold by the company during the period. Therefore, if a company starts with $10 million in inventory, makes $2 million in purchases and ends the period with $9 million in inventory, the company's cost of goods for the period would be $3 million ($10 million + $2 million - $9 million).

RELATED TERMS
  1. Cost Of Revenue

    The total cost of manufacturing and delivering a product or service. ...
  2. Average Cost Flow Assumption

    A calculation used by companies to monitor inventory goods. The ...
  3. Carrying Cost Of Inventory

    This is the cost a business incurs over a certain period of time, ...
  4. Direct Cost

    A price that can be completely attributed to the production of ...
  5. Gross Margin Return On Investment ...

    An inventory profitability evaluation ratio that analyzes a firm's ...
  6. Inventory

    The raw materials, work-in-process goods and completely finished ...
Related Articles
  1. Investing

    Operating Income

    Amount of profit realized from a business's operations after taking out operating expenses - such as cost of goods sold (COGS) or wages - and depreciation.
  2. Investing

    Analyzing Operating Margins

    Find out how to put this important component of equity analysis to work for you.
  3. Investing

    Inventory Valuation For Investors: FIFO And LIFO

    We go over these methods of calculating this component of the balance sheet, and how the choice affects the bottom line.
  4. Investing

    Explaining Carrying Cost of Inventory

    The carrying cost of inventory is the cost a business pays for holding goods in stock.
  5. Investing

    How to Analyze a Company's Inventory

    Discover how to analyze a company's inventory by understanding different types of inventory and doing a quantitative and qualitative assessment of inventory.
  6. Investing

    Days Sales of Inventory

    Days Sales of Inventory, also called Days Inventory Outstanding, is a key financial measurement of a company's performance pertaining to inventory management. In simple terms, it tells how many ...
  7. Entrepreneurship & Small Business

    What Are The Different Types Of Costs In Cost Accounting?

    Cost accounting measures several different types of costs associated with a company’s production processes.
  8. Investing

    Understanding Periodic Vs. Perpetual Inventory

    An overview of the two primary inventory accounting systems.
  9. Investing

    Reading The Inventory Turnover

    Inventory turnover is a ratio that shows how quickly a company uses up its supply of goods over a given time frame. Inventory turnover may be calculated as the market value of sales divided by ...
  10. Investing

    Measuring Company Efficiency

    Three useful indicators for measuring a retail company's efficiency are its inventory turnaround times, its receivables and its collection period.
RELATED FAQS
  1. What are some examples of industries that cannot claim cost of goods sold (COGS)?

    Discover which types of businesses are not allowed to list cost of goods sold on their income statement or claim their COGS ... Read Answer >>
  2. What qualifies as "goods" in cost of goods sold (COGS)?

    Learn what qualifies as "goods" in cost of goods sold, or COGS, so you can keep an accurate record for your business' income ... Read Answer >>
  3. What are direct costs of sales?

    Learn about direct costs of sales and cost of goods sold (COGs), what direct costs of sales measures and how to calculate ... Read Answer >>
  4. What's the difference between cost of goods sold (COGS) and cost of sales?

    Explore the difference between the cost of goods sold and cost of sales listed on an income statement, and what types of ... Read Answer >>
  5. What are examples of cost of goods sold (COGS) for businesses that sell through eBay ...

    Read how online retailers that operate through eBay or Etsy can list certain expenses as cost of goods sold and even claim ... Read Answer >>
  6. How does fixed costs and variable costs affect gross profit?

    Learn about the differences between fixed and variable costs and how they affect the calculation of gross profit by impacting ... Read Answer >>
Hot Definitions
  1. Quantitative Trading

    Trading strategies based on quantitative analysis which rely on mathematical computations and number crunching to identify ...
  2. Bond Ladder

    A portfolio of fixed-income securities in which each security has a significantly different maturity date. The purpose of ...
  3. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  4. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  5. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  6. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
Trading Center