What is Cost of Sales (COGS)?
Cost of Sales (COGS), also known as Cost of Goods Sold, refers to the total direct costs a business incurs in producing or acquiring the goods it sells during a specific period. These costs typically include raw materials, direct labour, manufacturing overheads, packaging, and other expenses directly related to the production or fulfilment of products.
COGS does not generally include indirect costs or operating expenses, such as sales, marketing, administration, and other overhead costs that are not directly attributable to the goods sold.
Cost of Sales is an important metric because it is used to calculate both gross profit and gross margin, helping businesses assess the profitability of their products and operation.
Formula:
Cost of Sales = Opening Inventory + Purchases − Closing Inventory
For example, if a business starts the period with £10,000 of inventory, purchases £40,000 of additional stock, and ends the period with £15,000 of inventory, its Cost of Sales would be £35,000.
