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Cost of Goods Sold - Meaning and Formula

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by Beroe Inc,
4 November 2022

What is the Cost of Goods Sold (COGS)?

The sum of all costs and expenses incurred to produce a good or service sold by a company is known as COGS. The total sum covers the raw materials, labor, and overhead Cost, which are directly related to the production. It does not include sales or distribution costs. 

COGS is also sometimes referred to as Cost of Sales. 

Cost of Sales or Cost of Goods Sold (COGS) is an expense deducted from sales revenue in the income statement to determine the gross profit or gross margin. 

Gross profit is a profitability metric that assesses how well a company manages its labor and raw materials during production.

How to calculate COGS?

COGS can be calculated using the below formula: 

Beginning inventory + Purchases - Ending inventory = Cost of goods sold.

Here, beginning inventory implies the Cost of raw materials and finished goods at the commencement of the reporting period. On the other hand, ‘Purchases’ include all the raw materials purchased during the reporting period. 

Finally, the ending inventory is the stock of raw materials and goods at the end of the period.

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