Accounting & Bookkeeping

Knowledge Base

Definition of Cost of Goods Sold

Cost of sales, often referred to as Cost of goods sold (COGS) represents the direct costs associated with the production of goods that a company sells.

For manufacturing companies, it includes the costs of producing or purchasing raw materials and transforming them into finished goods. For retailers, it involves the cost of purchasing inventory items for resale.

The formula for calculating Cost of Sales is:-

COGS = Opening Inventory + Purchase/Production Costs - Closing inventory

Here's a breakdown of the components:

COMPONENTS	DEFINITION
Opening Inventory	The value of inventory at the beginning of the accounting period
Purchases/Production Costs	Manufacturing companies: this includes the direct costs of producing goods, such as raw materials, labor, and factory overhead. For retail or service companies, it represents the cost of purchasing finished goods for resale.
Closing Inventory	The value of inventory at the end of the accounting period

The Cost of Sales is a key figure in determining a company's gross profit. The gross profit is calculated as follows:

Gross Profit = Revenue - COGS

Here's a brief explanation of the terms:

COMPONENTS	DEFINITION
Revenue	Total income generated from sales
Gross profit	Amount of money a company makes from its core business operations after deducting the direct costs associated with producing or acquiring the goods sold.

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