What Is Cost of Goods Sold (COGS)?
Formula, what is included, and a worked example.
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Quick answerCost of goods sold (COGS) is the direct cost of producing or buying the goods a business sold during a period. It is deducted from revenue to find gross profit.
COGS = Opening inventory + Purchases − Closing inventory
| Appears on | Income statement |
|---|---|
| Includes | Direct materials, direct labour, direct production costs |
| Excludes | Marketing, office rent, admin salaries |
COGS in plain English
COGS only counts the cost of goods that were actually sold. Stock still on the shelf at the end of the period stays in inventory and is not part of COGS yet.
Worked example
| Opening inventory | 2,000 |
| Add: purchases | 10,000 |
| Goods available for sale | 12,000 |
| Less: closing inventory | (3,000) |
| Cost of goods sold | 9,000 |
|---|
If revenue was 15,000, gross profit is 15,000 − 9,000 = 6,000.
Common mistakes
- Including operating expenses such as rent or marketing in COGS.
- Forgetting to adjust for closing inventory.
Frequently asked questions
What is the difference between COGS and operating expenses?
COGS is the direct cost of the goods sold. Operating expenses are the costs of running the business, such as rent and marketing.
Do service businesses have COGS?
Many report a similar “cost of services” for direct costs such as the wages of staff delivering the service.
How does COGS affect gross profit?
Lower COGS means higher gross profit, because gross profit equals revenue minus COGS.
Keep learning
This page is for general learning. Accounting rules vary by country and standard.