What is Cost of Goods Sold? - Definition from WhatIs.com (2024)

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What is Cost of Goods Sold? - Definition from WhatIs.com? ›

Cost of goods sold (COGS) is the total of the costs directly attributable to producing things that can be sold. COGS includes direct costs, such as material and labor, but does not include indirect costs, such as sales, marketing or distribution.

Cost of goods sold (COGS) definition

The cost of goods sold (COGS) is the sum of all direct costs associated with making a product. It appears on an income statement and typically includes money mainly spent on raw materials and labour.

Cost of goods sold (COGS) refers to the direct costs of producing the goods sold by a company. This amount includes the cost of the materials and labor directly used to create the good. It excludes indirect expenses, such as distribution costs and sales force costs.

Cost of goods sold is the total amount your business paid as a cost directly related to the sale of products. Depending on your business, that may include products purchased for resale, raw materials, packaging, and direct labor related to producing or selling the goods.

Cost of goods sold is usually the largest expense on the income statement of a company selling products or goods. Cost of Goods Sold is a general ledger account under the perpetual inventory system.

COGS Example A: The Woodworker

Throughout the year, you purchase Additional Inventory worth $7,000. By the end of the year, your Ending Inventory (unsold materials) is $2,000. In this example, your COGS as a woodworker for the financial year is $8,000.

COGS is sometimes referred to as cost of merchandise sold or cost of sales. Some companies that sell a mix of products and services prefer a broader term, cost of revenue, of which COGS is one component.

To compute cost of goods sold, start with the cost of beginning inventory of finished goods, add the cost of goods manufactured, and then subtract the cost of ending inventory of finished goods.

The 30% to 35% rule is a good guideline for the average cost of goods sold for restaurants. This percentage should cover the cost of all food and beverage items sold, including labor and other direct costs associated with preparing and serving those items.

At a basic level, the cost of goods sold formula is: Starting inventory + purchases − ending inventory = cost of goods sold. To make this work in practice, however, you need a clear and consistent approach to valuing your inventory and accounting for your costs.

Should COGS be high or low? ›

The lower COGS, the better, as it indicates a high profit margin on sales or services. While COGS should certainly be a focus for optimizing financial health, some business models naturally lend themselves to higher margins (eg.

On the flip side, items that are excluded from COGS include selling, general and administrative expenses such as distribution costs to customers, office rents, advertising, accounting and legal fees, and management salaries.

COGS is often the second line item appearing on the income statement, coming right after sales revenue. COGS is deducted from revenue to find gross profit.

Cost of goods sold (COGS) is also known as cost of sales. It refers to the total cost involved in manufacturing a business' product, or the total cost of a product that is purchased, then sold.

Examples of COGS include the cost of raw materials, direct labor costs, and manufacturing overhead costs. In a retail business, the cost of the products purchased for resale would be considered COGS. For a service business, COGS may include the cost of supplies or labor directly associated with providing the service.

The difference between cost of goods sold and cost of sales is that the former refers to the company's cost to make products from parts or raw materials, while the latter is the total cost of a business creating a good or service for purchase.

The cost of goods available for sale equals the beginning value of inventory plus the cost of goods purchased. The cost of goods sold equals the cost of goods available for sale less the ending value of inventory.

The formula is as follows: COGS = Beginning Inventory + Purchases during the period − Ending Inventory Where, COGS = Cost of Goods Sold Beginning inventory is the amount of inventory left over a previous period. It can be a month, quarter, etc.

Analysis: Cost of sales analyzes the direct and indirect costs related to a company's sale of its goods and services, while COGS analyzes the direct costs associated with the production of a company's goods.