Cost of Goods Sold (COGS)

Cost of Goods Sold (COGS) is the total direct cost of producing or purchasing the products a company sells. It includes raw materials, direct labor, and manufacturing overhead — but NOT indirect costs like rent or marketing.

Formula: COGS = Beginning Inventory + Purchases - Ending Inventory. If you started with $20,000 in inventory, bought $80,000 more, and ended with $15,000, your COGS is $85,000.

COGS is subtracted from revenue to calculate gross profit. It directly impacts profitability — lower COGS means higher margins. It appears on the income statement.