Glossary

Cost of goods sold (COGS)

Definition

Cost of goods sold (COGS) is the cost of the inventory a business sold during a period, including purchase or production cost and the costs of bringing goods to a saleable condition, such as freight in. It is calculated as opening inventory plus purchases minus closing inventory and is deducted from revenue to give gross profit.

How it works

COGS includes the purchase price net of discounts, import duties, inbound freight and, for manufacturers, direct materials, direct labour and production overhead. It excludes selling costs, administrative salaries and outbound shipping, which are operating expenses.

The cost formula changes COGS when prices move. Under FIFO the oldest costs are expensed first; under the weighted average cost method every unit sold carries the average. In a perpetual system such as Ledgeriano's inventory module, COGS is posted automatically with each delivery, so the inventory guide and the ledger always agree.

Formula

COGS = Opening inventory + Purchases - Closing inventory

Gross profit = Revenue - COGS

Example: COGS for a quarter

A retailer starts the quarter with inventory of 20,000, buys goods for 65,000 including inbound freight, and counts 15,000 of stock at quarter end. COGS is 20,000 + 65,000 - 15,000 = 70,000. With sales of 110,000, gross profit is 40,000.

Example: COGS for a quarter
Line	Amount
Opening inventory	20,000
Plus purchases	65,000
Goods available for sale	85,000
Less closing inventory	15,000
Cost of goods sold	70,000

Related terms

Gross profit
Gross profit is revenue minus the cost of goods sold. Divided by revenue it gives the gross margin, which shows how much of each sale is left to pay operating expenses and earn a profit.
FIFO (first in, first out)
FIFO is an inventory cost formula that assumes the oldest units are issued first, so cost of sales uses older prices and closing stock is valued at the most recent ones. IAS 2 permits it for interchangeable items.
Weighted average cost
Weighted average cost values each issue at the average cost of the units on hand. In a perpetual system the average is recalculated after every receipt, which is called the moving weighted average.
Inventory turnover
Inventory turnover is cost of goods sold divided by average inventory, showing how many times stock is sold and replaced in a period. Dividing 365 by it gives days inventory outstanding, the average number of days goods sit in stock.
Expenses
Expenses are decreases in economic benefits during a period, through outflows or used-up assets, that reduce equity other than distributions to owners. Examples are salaries, rent, depreciation and the cost of goods sold.

Guides

Inventory Valuation and Cost Accounting for Manufacturers: FIFO, Job and Process Costing

Free calculators

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FAQ

Questions about Cost of goods sold (COGS)

Is COGS an expense?

Yes. COGS is the expense that matches inventory costs to the revenue from selling it, and it is usually the largest expense of a trading business.

Do service businesses have COGS?

They usually call it cost of services or cost of revenue: the direct labour and subcontracting costs of delivering the service.

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