What is Cost of Goods Sold (COGS)

The Cost of Goods sold is sometimes also referred to as "Cost of Sales". The Cost of Goods Sold (COGS) is determined by adding up the cost of goods available minus any ending inventory. Cost of goods sold is deducted from a business gross receipts to determine its gross profit. Generally the following items are included in the total COGS:

Materials Used for Production: Includes raw material, components, the direct materials used in the production of goods plus the cost of packaging the finished product. 

Direct Labor Costs: Total wages paid to the workers directly involved in the production of goods

Manufacturing overhead: The indirect costs associated with the production process such as electricity, equipment depreciation, and rent for a factory or storage facility. 

Cost of merchandise: The cost of purchasing the product plus freight charges. 

The formula for calculating the COGS is: Beginning Inventory + Purchases in current period - Ending Inventory = Cost of Goods Sold (COGS)