Cost of Goods Sold

What is Cost of Goods Sold?

Cost of goods sold, or COGS, refers to the direct costs incurred to produce finished goods which are made available for resale as well as any additional costs to get the product into inventory and available for sale.  It is essentially what it costs the company to generate sales.  Direct costs include wages to laborers, material costs to produce the goods, and even shipping and handling fees; however, other costs such as marketing and sales are not included in this figure.  For example, a computer manufacturing company would include the labor costs associated with putting a new computer together as well as the cost of the motherboard, memory, hard drive, case, fan, and other components that comprise a computer in their cost of goods sold figure.  If the company offers free shipping, this would also be included in this number.

COGS is found on the income statement and is subtracted from total revenue to arrive at gross profit.  The cost of goods sold for a specific period can be also calculated by taking the beginning inventory number and adding cost of goods for the current period and then subtracting the ending inventory.
Tim Ord
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