COGS, or Cost of Goods Sold, is a key financial metric that represents the direct costs of producing or purchasing the goods that a company sells. To calculate COGS, follow these steps:

Determine the beginning inventory for the period. This is the value of the inventory at the start of the period.

Add any inventory purchases made during the period. This includes any goods purchased for resale or raw materials purchased for production.

Subtract the ending inventory for the period. This is the value of the inventory at the end of the period.

The result is the cost of goods sold for the period.

The formula for calculating COGS is:

COGS = Beginning Inventory + Purchases - Ending Inventory

It's important to note that the COGS formula only includes direct costs that are directly related to the production or purchase of goods, such as the cost of raw materials, labor, and overhead expenses. It does not include indirect costs such as marketing or administrative expenses.

Accurately calculating COGS is critical for determining the profitability of a company and making informed business decisions. By tracking COGS over time, a business can identify trends and make adjustments to their pricing, production, and inventory strategies to improve profitability.