COGS

Cost of goods sold (COGS) is an accounting metric that represents the direct costs incurred to produce or acquire the goods a business sells during a period. For manufacturers, COGS includes direct materials, direct labor, and a share of manufacturing overhead, and it is adjusted for changes in finished goods inventory. The typical formula is COGS = beginning finished goods inventory + cost of goods manufactured - ending finished goods inventory. For retailers and distributors, COGS usually equals beginning inventory plus purchases (including freight and other costs to bring goods to sale) minus ending inventory. A common alternative expression is COGS = cost of goods available for sale - ending inventory.

On the income statement, COGS is subtracted from revenue to determine gross profit, and gross profit is used to calculate gross margin. COGS is distinct from operating expenses, which are recorded separately below gross profit.

Inventory accounting methods affect COGS. The main methods are specific identification, FIFO (first-in, first-out), LIFO (last-in, first-out), and weighted-average cost. FIFO typically yields lower COGS and higher ending inventory in inflationary periods; LIFO can increase COGS and reduce taxable income but is allowed under US GAAP and not under IFRS in most cases. Weighted-average cost smooths costs over the period. The choice of method can influence reported profitability and taxes, even though it may not reflect exact cash outlays.

COGS is a standard measure for evaluating profitability and pricing strategy, and it is closely watched alongside revenue and inventory levels. It can be affected by production efficiency, supplier prices, and inventory management practices.