Costs of Goods Sold (COGS) is a term used to describe the direct expenses incurred in producing or acquiring goods that are sold by a business. The term is mathematically represented using the formula below.
Cost of Goods Sold = (Starting inventory + purchases) - ending inventory
The cost of materials used in producing or packaging goods, cost of labour employed in the production process, and cost of transporting products from one place to another are all taken note of when determining COGS.
One of the major reasons why a business would calculate its Cost of Goods Sold is to apply accurate and profitable prices to its goods. The price of each product multiplied by the total number of available products must outweigh the cost of goods sold if a business is to realise gross profit.