Frequently asked questions
What is cost of goods sold (COGS)?
COGS is the direct cost of the products you sold during a period.
What is the COGS formula?
COGS = beginning inventory + purchases − ending inventory. With 20,000 + 60,000 − 25,000, COGS is 55,000.
What is included in COGS?
The purchase price of goods, inbound freight and duties, and for manufacturers the direct materials and direct labour.
What is not included?
Marketing, office rent, administrative salaries and usually the cost of shipping to customers, which are treated as operating expenses.
Why is COGS important?
Gross profit equals revenue minus COGS, so COGS affects your margins, tax and pricing decisions.
Where do I get beginning inventory?
It is the ending inventory of the previous period, so it should match your last closing figure.
How do returns and discounts affect purchases?
Use purchases net of returns and supplier discounts, so the figure reflects what you actually paid.
Do FIFO, LIFO and average cost change COGS?
Yes. The costing method decides which costs are matched to sales. Use one method consistently. LIFO is not permitted under IFRS.
Do service businesses have COGS?
Pure service businesses usually do not, though some report a cost of services, such as direct labour on client work.
How can I check my result?
A negative COGS or a figure far from your sales history usually means a mistake in the inventory counts or purchases.
What is the difference between COGS and operating expenses?
COGS is the direct cost of the goods you sold. Operating expenses are the costs of running the business, such as rent, marketing and administration.
How does COGS affect gross profit?
Gross profit is revenue minus COGS, so higher COGS lowers gross profit and gross margin. Track it every period to spot rising costs.
Is delivery to my customer part of COGS?
Outbound shipping is usually a selling expense, while freight paid to bring goods in is part of inventory cost. Treatment can vary with accounting rules.
How do I calculate COGS for a period?
Beginning inventory plus purchases minus ending inventory. For example, 20,000 + 60,000 − 25,000 = 55,000.
Why does COGS matter for tax?
It reduces your taxable profit, so accurate stock counts and purchase records matter. Rules differ by country, so confirm the details with an accountant.