How do you calculate COGS exactly? To build on the simple equation above, we’re going to look at a way to calculate the cost of goods sold and what it represents when referred to in an income statement and basic accounting.įirstly, for accounting purposes, your COGS isn’t as simple as it seems. Only direct materials and direct labour and overheads can be considered COGS. This leads to an interesting question: what are not considered COGS?Īny cost incurred that relate to advertising, distribution, management, marketing, indirect overheads etc are not COGS. If a manufacturer buys materials to manufacture a product and then sells that product to a distributer, the price of materials, production labour and overheads are also known as cost of goods sold.Īs you can see, it’s not only a direct material expense or products that constitute COGS, but also direct labour and cost incursions. ![]() This also holds true for the manufacturing industry. Put another way: sales revenue – cost of goods sold = gross profit.įor example, If your business creates a product for nine dollars, incurring one dollar in direct overhead costs along the way and you then sell that product for fifteen dollars, your COGS is ten dollars and your gross profit is five dollars. The cost of goods sold is the wholesale price of a product or material to a distributer, retailer, or manufacturer before they add their margin and create sales revenue. What is cost of goods sold (COGS)ĬOGS is essentially how much it costs you to produce your products or services. Understanding how to calculate COGS sits at the heart of basic accounting and sales practices.Īs a case in point, cost of goods sold is often featured in the second line of a business’s income statement or profit and loss statement. ![]() What is the cost of goods sold? How do you calculate cost of goods sold? Simply, the cost of goods sold (COGS) is a core calculation in the buying and selling of goods by a small business, distributer, wholesaler, or manufacturer and we’ll show you how to calculate COGS.
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