Cost of Goods Sold (COGS) is a measure of the cost of raw materials and finished goods that are used in the production and sale of goods. It includes the cost of materials, labor, and factory overhead.

Formula:

Cost of Goods Sold = Beginning Inventory + Purchases - Ending Inventory

Components of Cost of Goods Sold:

• Beginning Inventory: The cost of inventory at the beginning of the accounting period.
• Purchases: The cost of goods purchased during the period.
• Ending Inventory: The cost of inventory at the end of the accounting period.

Exclusions:

• Depreciation of fixed assets
• Interest expense
• Selling expenses

Purpose:

• To determine the cost of goods sold as a percentage of revenue, known as the cost of goods sold ratio.
• To calculate the gross profit, which is the difference between revenue and cost of goods sold.
• To provide information for inventory management and cost control.

Example:

A company has the following information for the year:

• Beginning Inventory = $10,000
• Purchases = $20,000
• Ending Inventory = $12,000

Cost of Goods Sold = $10,000 + $20,000 – $12,000 = $18,000

Cost of Goods Sold Ratio = $18,000 / $50,000 = 36%

Key Points:

• Cost of goods sold includes the cost of materials, labor, and factory overhead.
• It is used to calculate gross profit and the cost of goods sold ratio.
• Exclusions include depreciation of fixed assets, interest expense, and selling expenses.