Cost of goods sold (COGS) is a financial metric that represents the direct cost incurred by a company to produce and sell its products or services.
It includes all the expenses directly associated with the production of goods or services, such as materials, labor, and overhead costs.
The cost of goods sold is a critical metric for businesses because it directly impacts their gross profit margin. Gross profit is the difference between the revenue generated by a company and the cost of goods sold.
If the cost of goods sold is high, the gross profit margin will be low, and the business will have less money left over to cover other expenses or reinvest in the company.
Calculating the cost of goods sold is relatively straightforward. It is determined by adding the cost of all the products or services sold during a particular period and subtracting the cost of any products or services that were returned or not sold.
The cost of goods sold can also be calculated by adding the beginning inventory value to the cost of goods purchased during a period and then subtracting the ending inventory value.
It’s important to note that the COGS is specific to companies that sell physical goods.
For service-based businesses, the equivalent concept may be called the “Cost of Services Rendered” or “Cost of Revenue,” and it is used similarly to calculate the direct costs associated with delivering services.
