At year's end, subtract those finished products not sold from the total beginning inventory and new purchases. Then you can add any direct costs, such as additional purchases or items produced within that tax year. Calculating total COGS follows a simple formula: COGS = beginning inventory + new purchases during the tax year − ending inventory Related: A Guide to Finance Careers How to calculate COGS in 7 steps The basic calculation for COGS requires you to determine the company's beginning inventory, which is the inventory it had at the start of the tax year. Companies typically calculate the value of their inventory at the beginning and end of the fiscal or tax year. The inventory can include finished items the company resells or parts and materials it uses to manufacture its products. For companies that sell physical products, the COGS calculation depends on the value of their inventory. To establish whether to calculate an expense when calculating COGS, it's often helpful to determine whether the company might have had the outlay if it made no sales. This means COGS only includes direct costs of producing goods or delivering services purchased by customers during a specified year. COGS strictly applies to costs directly related to the production of goods destined for sale. Related: What Is an Income Statement? (With Definition and Template) Determining cost of goods sold Calculating COGS involves quantifying and calculating all costs associated with the sale of a product. Depending on which accounting model a business applies to calculate COGS, the value of these goods can also change. As long as the wholesale or retail price remains greater than COGS, the company typically makes a profit.

For this reason, it's often beneficial for a business to maintain lower COGS so its net profits are higher. Although this may be helpful for reducing income taxes owed, it also means a company's shareholders may receive fewer returns. By deducting COGS from a company's total net sales, you can determine its net revenue, so as COGS rises, total net profit falls. Economists also refer to COGS as costs of sales or costs of doing business, so they report it as a business expense on standard income statements. For service-centred businesses, like veterinarians, COGS can include wages, employee benefits, or materials used in delivering the service. Not included are many indirect costs, like administrative, sales, or marketing expenses. This means that the inventory value recorded under current assets is the ending inventory.View more jobs on Indeed View more Reviewing a simple COGS definition The COGS definition states that the cost of a product includes raw materials used to produce the good, direct labour or employees hired, and long-term expenses such as equipment used in production. The balance sheet only captures a company’s financial health at the end of an accounting period. Under this account is an item called inventory. The balance sheet has an account called the current assets account. The final number derived from the calculation is the cost of goods sold for the year. At the end of the year, the products that were not sold are subtracted from the sum of beginning inventory and additional purchases. The beginning inventory for the year is the inventory left over from the previous year-that is, the merchandise that was not sold in the previous year.Īny additional productions or purchases made by a manufacturing or retail company are added to the beginning inventory. Inventory that is sold appears in the income statement under the COGS account. COGS = Beginning Inventory + P − Ending Inventory where P = Purchases during the period Formula and Calculation of Cost of Goods Sold (COGS)

COGS only applies to those costs directly related to producing goods intended for sale.

Accounting cogs definition