Cost of Goods Sold (COGS)

Cost of Goods Sold is a financial metric that represents the direct costs attributable to the production of the goods sold by a company.

Cost of Goods Sold (COGS) is a financial metric that represents the direct costs attributable to the production of the goods sold by a company. This includes the cost of the materials and labor directly used to create the product. For retailers, COGS is crucial as it directly impacts the profitability of the business.

To calculate COGS, the following formula is used:

COGS = Beginning Inventory + Purchases During the Period - Ending Inventory

Here's what each term means:

Beginning Inventory: The value of the inventory at the start of the accounting period.
Purchases During the Period: The cost of inventory bought during the accounting period.
Ending Inventory: The value of the inventory at the end of the accounting period.

COGS is important because it affects the gross profit of a retailer. Gross profit is calculated by subtracting COGS from sales revenue. Understanding COGS helps retailers price their products appropriately, manage their inventory levels efficiently, and strategize to improve profitability. It's also a key figure in financial reporting and tax calculations.