Cost of Goods Sold, or COGS, is the direct cost of the products a business sold during a specific period. It is also called the cost of sales. COGS helps a company understand how much it spent to provide the goods that produced its sales.
For a retailer, COGS usually includes the purchase cost of the products sold, along with costs needed to bring them into saleable condition. For a manufacturer, it can include raw materials, direct production labor, and an allocated share of production costs, such as factory overhead. The exact costs included depend on the company’s accounting policies and applicable accounting rules.
COGS does not usually include general expenses that are not directly tied to making or buying the goods. Examples may include office salaries, marketing, and sales commissions. These are usually recorded as operating expenses.
A basic formula is:
COGS = Beginning inventory + purchases or production costs − ending inventory
For example, if a business starts the month with €20,000 of inventory, adds €8,000 in purchases, and ends with €5,000 of inventory, its COGS is €23,000.
COGS is used to calculate gross profit:
Gross profit = net sales − COGS
It is also used in financial analysis. For example, the inventory turnover ratio is commonly calculated by dividing COGS by average inventory. This helps show how quickly a business sells and replaces its stock.
Accurate COGS depends on reliable records for purchases, production, inventory movements, and stock valuation. In an ERP system, connecting these records can help businesses track product costs and understand how sales affect inventory and financial results.
