Cost of Goods Sold

What is Cost of Goods Sold?

Cost of Goods Sold (COGS) represents the direct expenses incurred in producing the goods or services a company sells. It encompasses expenses such as raw materials, labor, manufacturing overhead, and other direct costs associated with the production process.

Calculated by subtracting the opening inventory from the sum of purchases and production costs, COGS is a fundamental component in determining a company’s gross profit and subsequently, its overall profitability. This metric not only reflects the financial outlay required to bring products to market but also plays a pivotal role in assessing operational efficiency and making informed pricing and inventory management decisions.

the amount of money that a company spends in order to make and sell products in a particular financial period, for example, on wages and raw materials


Cost of goods sold (COGS) is the carrying value of goods sold during a particular period.

Costs are associated with particular goods using one of the several formulas, including specific identification, first-in first-out (FIFO), or average cost. Costs include all costs of purchase, costs of conversion and other costs that are incurred in bringing the inventories to their present location and condition. Costs of goods made by the businesses include material, labor, and allocated overhead. The costs of those goods which are not yet sold are deferred as costs of inventory until the inventory is sold or written down in value.