Cost of goods sold or COGS includes the cost of the production or manufacturing of goods and products for a business. This amount would include the cost of the raw materials along with all of the costs of the labor that is associated with making the products. Costs that are excluded are indirect expenses like distribution costs and costs for the sales force. You will find the cost of goods sold number on the income statement. The formula for calculating the cost of goods sold is equal to the Beginning Merchandise Inventory plus the Net Purchases of Merchandise and the subtracting the Ending Merchandise Inventory. This will give you the COGS figure. In addition, this number can be deducted from the revenue in order the company’s gross margin.
Since COGS refers to the costs that are related to the creation of the products that company makes, therefore the costs that are included are those that are directly affiliated with the making of those products. Let’s take an example. If you have a hat making business then the COGS would include all of the costs that would be associated with the making of the hats. These costs would include fabric, thread, labor, etc. The cost of shipping the hats to retailers are not included in COGS, however.
The COGS is also useful in determining other key figures. You can calculate a company’s net income by subtracting the cost of goods sold in addition with the indirect expenses from the sales revenue.