Cost of Goods Sold (COGS) Calculator
Calculate your COGS by entering beginning inventory, purchases, and ending inventory. Get accurate cost analysis for better financial planning.
This COGS calculator helps you quickly determine the Cost of Goods Sold for your business. Understanding COGS is essential for calculating gross profit and analyzing your business's financial health.
What is Cost of Goods Sold (COGS)?
Cost of Goods Sold (COGS) represents the direct costs attributable to the production or purchase of goods sold by a company during a specific period. COGS is a critical metric that appears on your income statement and directly impacts your gross profit.
How to Calculate COGS
The basic COGS formula is:
COGS = Beginning Inventory + Purchases - Ending Inventory
For example:
- Beginning Inventory: $50,000
- Purchases during period: $100,000
- Ending Inventory: $40,000
- COGS: $50,000 + $100,000 - $40,000 = $110,000
This means you sold $110,000 worth of inventory during the period.
Components of COGS
Beginning Inventory
The value of inventory you had at the start of the accounting period. This becomes the starting point for your calculation.
Purchases
All inventory purchases made during the period, including:
- Raw materials
- Finished goods for resale
- Direct labor costs
- Manufacturing overhead
- Freight-in costs
Ending Inventory
The value of unsold inventory at the end of the period. This is subtracted because it represents goods that weren't sold and shouldn't be counted as COGS.
Why COGS Matters
Gross Profit Calculation
Gross Profit = Revenue - COGS
COGS is essential for calculating gross profit, which shows how efficiently you're producing or purchasing your products.
Pricing Decisions
Understanding your true COGS helps you:
- Set profitable pricing
- Identify cost-saving opportunities
- Negotiate better with suppliers
- Evaluate product profitability
Tax Implications
COGS is tax-deductible, reducing your taxable income. Accurate COGS calculation ensures you're not overpaying taxes.
What's Included vs Excluded
Included in COGS:
- Direct materials
- Direct labor
- Manufacturing overhead
- Freight-in and shipping costs
- Storage costs directly related to production
NOT Included in COGS:
- Marketing and advertising
- Sales salaries and commissions
- Distribution costs
- Rent and utilities (unless directly tied to production)
- Administrative expenses
COGS by Industry
Retail
For retailers, COGS is relatively straightforward:
- Beginning inventory
- Plus: Purchases from suppliers
- Minus: Ending inventory
Manufacturing
Manufacturers have more complex COGS:
- Raw materials
- Direct labor
- Factory overhead
- Work-in-process inventory adjustments
Service Businesses
Service businesses may have minimal COGS:
- Direct labor for service delivery
- Materials used in providing service
- Subcontractor costs
Common COGS Mistakes
- Including Indirect Costs: Don't include marketing, rent, or administrative expenses
- Inaccurate Inventory Counts: Regular physical counts prevent errors
- Wrong Valuation Method: Choose FIFO, LIFO, or weighted average and stay consistent
- Forgetting Freight Costs: Include freight-in as part of inventory costs
- Mixing Personal and Business: Keep personal expenses separate
Frequently Asked Questions (FAQs)
What is Cost of Goods Sold (COGS)?
COGS is the direct cost of producing or purchasing the goods that a company sells during a specific period. It includes materials and direct labor but excludes indirect expenses.
How do I calculate COGS?
Use the formula: COGS = Beginning Inventory + Purchases - Ending Inventory. This shows how much inventory was actually sold during the period.
Why is COGS important?
COGS is crucial for calculating gross profit and understanding business profitability. It directly impacts your income statement and helps with pricing and purchasing decisions.
What's included in COGS?
COGS includes direct costs like raw materials, direct labor, manufacturing overhead, and freight-in. It does NOT include sales, marketing, or administrative expenses.
Can COGS be negative?
No, COGS cannot be negative in normal business operations. A negative result indicates an error in inventory valuation or tracking.