COGS (Cost of Goods Sold) Calculator
Total Cost of Goods Sold:
What is Cost of Goods Sold (COGS)?
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.
COGS = (Beginning Inventory + Purchases) – Ending Inventory
How to Calculate COGS: A Step-by-Step Guide
To calculate the COGS for a specific accounting period (month, quarter, or year), follow these steps:
- Identify Beginning Inventory: This is the value of all products, materials, and work-in-progress items you had in stock at the very start of the period. This should match the Ending Inventory of the previous period.
- Add New Purchases: Include the cost of all raw materials or finished products purchased during the period. Don't forget to include direct labor and freight-in costs if applicable.
- Subtract Ending Inventory: Determine the value of the items still on your shelves or in your warehouse at the close of the period.
Practical Example
Imagine a small retail shop calculating its COGS for the month of January:
- Beginning Inventory: $15,000 (Value on January 1st)
- Purchases: $8,000 (New stock ordered in January)
- Ending Inventory: $7,000 (Value on January 31st)
Calculation: ($15,000 + $8,000) – $7,000 = $16,000. This means the shop spent $16,000 to earn its revenue during January.
Why Monitoring COGS Matters
COGS is a critical metric for determining your Gross Profit. By subtracting COGS from your Total Revenue, you can see how much money is left to cover operating expenses and net income. If your COGS is rising while your prices stay the same, your profit margins will shrink, signaling a need to find cheaper suppliers or increase your efficiency.