Profitability
Cost of goods sold (COGS)
Cost of goods sold is the direct cost of producing or buying what a business sold in a period, such as materials, stock purchases and direct labour.
COGS = Beginning inventory + Purchases − Ending inventory
Worked example
| Beginning inventory | $80,000 |
| Purchases during the year | $300,000 |
| Ending inventory | $100,000 |
$80,000 + $300,000 − $100,000 = $280,000
Why it matters
COGS sets gross margin, and gross margin pays for everything else. What you put above or below the COGS line changes every margin, ratio and comparison built on it.
Common mistakes
Where it misleads
Booking direct labour or subcontractors as operating expenses, which flatters gross margin.
Expensing inventory when it is bought instead of when it is sold, so COGS swings with purchasing rather than sales.
Changing what counts as COGS between periods, which breaks every trend line.
Related terms
Keep reading
- Gross marginGross margin is the share of revenue left after paying the direct costs of delivering what you sold.
- Days inventory outstanding (DIO)Days inventory outstanding is the average number of days a business holds inventory before it is sold.
- Contribution marginContribution margin is what each sale leaves over after every cost that rises with that sale, available to cover fixed costs and profit.
Stop calculating it by hand.
Dear CFO keeps your statements, forecasts and metrics current from the systems you already run.