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Business Financials – How to Calculate Cost of Sales (COS) formula or Cost of Goods Sold (COGS)
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Published on Thursday, 15 September 2022 12:06
Cost of Sales (COS) or Cost of goods sold (COGS) is the cost of the product that was sold to customers. It often includes the cost of materials and direct labour used to produce the goods ready to sell. The cost of goods sold is reported on the profit and loss at the time/period the sales of the goods that are sold, are reported (when invoiced if accrual, or cash receipt if cash reporting).
A retailer's cost of goods sold includes the cost from its supplier plus any additional costs necessary to get the product into inventory and ready for sale.
How to calculate cost of sales
A store purchases a book from a publisher. If the cost from the publisher is $60 plus $5 in delivery costs, the store reports $65 in its Inventory Account until the book is sold. When the book is sold, the $65 is removed from inventory and is reported as cost of goods sold on the profit and loss COS account.
COS is usually the largest expense on the profit and loss of a company selling products or goods.
COS are deducted from the sales/revenue.
Cost of goods sold/COS is calculated in full, as follows:
cost of beginning inventory + cost of goods purchased (net of any return stock) + freight-in - cost of ending inventory
This COGS account balance or this calculated amount will be deducted from the sales amount on the income statement or Profit and Loss, leaving a Gross Profit.
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