The formula is as follows:ĬOGS = Beginning Inventory + Purchases during the period − Ending Inventoryīeginning inventory is the amount of inventory left over a previous period. Just like any other financial metric, COGS also has a formula which can be used for its calculation. What is the Formula to calculate Cost of Goods Sold or COGS? COGS is also used by analysts and investors to check the company’s position in the market. So, the companies try to keep the COGS low. If the cost of goods sold is high then it shows that the company’s net income is less and as a result the profit is less. It is very important to keep a record of COGS as the final COGS or cost of sold goods is subtracted from the company’s revenue and therefore, is an important metric to measure the company’s gross profit. It should only include the costs that were involved in producing the services and providing them and should not include the costs of services or products that you produce for your own use and do not sell.Ĭost of goods sold also excludes all the indirect costs like the marketing expenses, distribution costs, shipping expenses, etc. This involves all the material as well as the labour that was required to produce the goods. In a more simple language, COGS is basically how much money you spent to produce the products or services of your business. The costs required to make the goods is what we call the cost of goods sold or the cost of goods services or the cost of sales. This Cost of sold goods can be also referred to as the cost of sales. This does not involve other costs like the cost of distribution or the sales force costs and solely refers to the cost of the production of goods. Cost of Goods Sold or as it is more popularly known, COGS is the cost of the material and labor that goes into the production of the goods.
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