Definition
An abbreviation for the cost of goods sold, COGS are the direct expenses associated with making a product or supplying a service. Typical expenses include direct labor and raw materials. Companies report the cost of goods sold on the income statement.
Calculation
If a company keeps an inventory, product, or raw materials on hand, then the cost of goods sold needs to account for changes to beginning and ending inventories. The cost of goods sold is calculated as follows:
Goods Available for Sale = Starting Inventory + Additions to Inventory
Cost of Goods Sold = Goods Available for Sale - Ending Inventory
Explanation
COGS should represent the actual cost to make a product; therefore, it will not include indirect expenses such as research and development or selling, general and administrative expense (SGA). The COGS is an important value because it's often used when calculating efficiency ratios such as gross profit margins.
Cost of goods sold typically appears as the first expense on the income statement, appearing just below revenues (sales).
Related Terms
The income statement is a financial accounting report that demonstrates how net income, or profit, is derived from revenues. The main categories appearing on an income statement include revenues, cost of goods sold, operating expenses, non-recurring items and net income.
Moneyzine EditorNovember 6th, 2024
The financial accounting term gross profit is used to describe a subtotal line item appearing on the income statement. Gross profit is the money left over after the cost of goods sold (COGS) is subtracted from revenues.Moneyzine EditorNovember 6th, 2024
The inventory turnover ratio tells the analyst how well a company manages its inventory. This metric requires data from both the income statement (revenues) and balance sheet (inventory).Moneyzine EditorNovember 6th, 2024
