How to Calculate the Cost of Goods Sold

Reviewed by David Chen, CFA This calculator and the associated content have been reviewed for financial accuracy and compliance with GAAP principles.

Use this Cost of Goods Sold (COGS) Calculator to quickly determine the total direct costs associated with the production of goods or services sold by your company during a specific period.

Cost of Goods Sold (COGS) Calculator

Calculated Cost of Goods Sold (COGS)

Cost of Goods Sold Formula

COGS = Beginning Inventory + Purchases – Ending Inventory

Formula Source: Investopedia, IRS Publication 334

Variables Explained

The COGS calculation requires three primary input variables:

• Beginning Inventory (BI): The total value of inventory a company holds at the start of an accounting period (e.g., January 1st). This value is usually the ending inventory from the previous period.
• Purchases (P): The total cost of all additional inventory purchased by the company during the accounting period, including raw materials, direct labor, and manufacturing overhead.
• Ending Inventory (EI): The total value of inventory remaining at the end of the accounting period (e.g., December 31st).

Related Financial Calculators

Explore these related tools to help manage your business finances:

• Gross Margin Calculator
• Inventory Turnover Ratio Analyzer
• Break-Even Point (BEP) Calculator
• Working Capital Estimator

What is Cost of Goods Sold?

The Cost of Goods Sold (COGS) is a crucial metric in financial accounting, representing the direct costs attributable to the production of the goods or services sold by a company. These direct costs include the cost of materials and direct labor used to create the good. It explicitly excludes indirect expenses like sales, marketing, and distribution.

COGS is reported on a company’s income statement and is subtracted from net sales (revenue) to determine the gross profit. A lower COGS generally means a higher gross profit, which is why businesses constantly seek ways to optimize their production and supply chain to manage this cost effectively.

How to Calculate COGS: A Step-by-Step Example

Let’s use an example to illustrate the calculation for a small retail business over one year:

1. Determine Beginning Inventory: The company started the year with $50,000 worth of inventory.
2. Tally Purchases: Over the year, the company spent $85,000 on new inventory, including shipping costs.
3. Calculate Goods Available for Sale (GAS): $50,000 (BI) + $85,000 (P) = $135,000 (GAS).
4. Determine Ending Inventory: At the end of the year, a physical count shows $40,000 worth of inventory remaining.
5. Calculate COGS: Subtract Ending Inventory from Goods Available for Sale. $135,000 – $40,000 = $95,000.

Frequently Asked Questions (FAQ)

What items are included in COGS?

COGS includes direct materials, direct labor, and manufacturing overhead (like utilities and rent for the factory). It specifically excludes operating expenses (OpEx) such as administrative salaries, marketing costs, and office supplies.

Is COGS an expense?

Yes, COGS is classified as an expense on the income statement. It is subtracted from revenue to arrive at gross profit, which is a key measure of a company’s financial health.

How does inventory valuation (LIFO/FIFO) affect COGS?

The inventory valuation method significantly impacts COGS. In an environment of rising prices, FIFO (First-In, First-Out) generally results in a lower COGS and higher net income, while LIFO (Last-In, First-Out) results in a higher COGS and lower net income.

Why is tracking COGS important for business?

Tracking COGS is vital because it directly impacts gross profit and profitability. Monitoring COGS helps businesses set optimal pricing strategies, control production costs, and identify inefficiencies in their inventory management or manufacturing processes.