The cost of goods sold (COGS) is the cost of the products that a retailer, distributor, or manufacturer has sold during a certain period.
Cost of goods sold measures the costs associated with purchasing or manufacturing materials that a company uses for sales.
A business strives for a low COGS ratio, meaning costs of producing a product are relatively low compared to the sales generated.
Formula to calculate COGS.
Beginning inventory is the book value of a company’s inventory at the start of an accounting period.
Purchases is the amount of goods a company bought throughout the accounting period.
Ending inventory is the value of goods still available for sale and held by a company at the end of an accounting period.
Example:
Determine the COGS of a retail shop if their inventory costs at the beginning of the year were $300,000, they made $400,000 worth of purchases throughout the year and had inventory costs of $150,000 at the end of the year.
Therefore, the COGS for the retail shop is $ 850,000.
