Why is COGS Important?Ĭost of Goods Sold (COGS) is a component of the Income Statement and plays a major role in calculating your Net Income. Therefore, the best way to ensure that you calculate COGS correctly is to contact a local CPA Firm to assist. After calculating the costs of the inventory acquired or made during the period, you add it to net inventory at the end of a period to determine the COGS.įor instance, if you started the year with $1,000 in inventory and acquired $5,000 of goods during the year and were left with $3,000 in inventory at the end of the year, COGS would be calculated as ($1,000 + $5,000 – $3,000 = $3,000).īecause every company is different, calculating COGS requires an understanding of your business operations and the intricacies of accounting and tax services.

If you are a reseller, you can include the cost you incurred to acquire the inventory.

If your business manufactures the inventory it sells, you may be able to include warehousing expenses and machinery leasing costs in your COGS. (Beginning Inventory Costs + Cost of Manufacturing New Inventory/Acquiring New Inventory) – Ending Inventory = COGS. In the accounting sense, COGS is calculated using the formula: Indirect costs such as marketing and distribution are not included in COGS. The main components of COGS are the direct expenses incurred such as production costs, inventory acquisition expense, labor, and raw materials. Not only will it affect your business directly, tracking COGS correctly can pay huge dividends when it comes time to file your business taxes. As a small business, understanding COGS can help you run a more efficient and profitable company. Cost of Goods Sold (COGS) includes all direct costs used during the production or acquisition of goods and inventory sold by a company.

Cogs meaning