What is Cost of Goods Sold (COGS) & How To Calculate It
Cost of goods sold (COGS) is an accumulation of the direct costs that went into the goods sold by your company. This includes the cost of any materials used in production as well as the cost of labor needed to produce the good. It does not include indirect expenses such as distribution costs and marketing costs.
How to Calculate Cost of Goods Sold
While you will most likely need a CPA or tax professional to calculate cost of goods sold, you can still do a basic calculation to see how the work is done and determine the information you will give to your CPA.
Remember that the only costs you will be including in the measure for your cost of goods sold are the ones that are directly tied into the production costs of your goods or services.
Here are the 3 terms you need to know to calculate COGS:
1. Beginning Inventory
This is the total cost of every product in your inventory at the start of the year. This should be exactly the same as your ending inventory from last year, otherwise, you will need to provide an explanation as to why they are different.
2. Additional Inventory
This is the total cost of inventory that you purchased during the year.
3. Ending Inventory
This is the total cost of all the items in your inventory at the end of the year. It’s a good idea to take a physical inventory count at least once a year (if not more). Don’t assume that what your accounting software matches exactly what you have in the warehouse. Theft and damage to products are the primary reasons for differences between the inventory on the books vs. the warehouse.