Cost of Goods Sold

The Cost of Goods Sold (COGS) refers to the carrying value of entities sold during any particular period of time. COGS basically includes the costs directly related to the production of these goods and the costs of inventory involved. It does not include the overhead costs, such as the property rent.

There are many factors involved in the calculation of COGS but the most basic formulation is as following:

Cost of Goods Sold = Beginning Inventory + Purchases during Reporting Period – Ending Inventory

COGS is included in the Income Statement, under the expenses tab. If the value exceeds the revenues for a particular line of production the business in not profitable while as long as the value of COGS remains lower than the revenues the item is profitable. It may be possible that the losses by an item are compensated by the profits of another. Thus, making the business an overall profit.

Let us understand the concept of COGS by a simple example:

Suppose you own a retail store that sells trousers. It’s the beginning of the season and you order 100 trousers as per the following data:

Now, by season end you sell 80 trousers. Thus, your Costs of Goods Sold is INR (80 X 100) = INR 8000.

By our formula, we have:

Beginning Inventory = 0

Purchases during the Reporting Period = INR 100 X 100

Ending Inventory = INR 20 X 100

Thus, COGS = 10,000 – 2,000 = INR 8000