What is Cost of Goods Sold (COGS)?

The cost of goods sold, or COGS, refers to the direct costs that contribute to the creation of the goods or products a company sells. Direct costs include the financial means it takes to manufacture the product, namely raw material and labor costs. The COGS definition is simply the combination of costs required to produce a good. Indirect costs such as distribution are excluded from the cost of goods sold.

The basic COGS formula:

Cost of Goods Sold = (Initial Inventory + Additional Costs) – Ending Inventory

To calculate COGS, take the cost of initial inventory and add additional material and labor costs. From that, subtract the value of the inventory to be sold.

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