If your business deals with a lot of variable expenses that impact your production and sales costs, like restaurants or grocery stores, knowing how to accurately calculate the cost of goods sold (COGS) is absolutely essential. If the COGS is not accurately recorded and analyzed, losses can quickly add up and, in some cases, completely devastate your business.
Understanding COGS is pretty straightforward in theory, but figuring out exactly how much you spend, and on what, can be tricky. Don’t worry — this guide is here to help.
What you’ll learn:
What is the cost of goods sold (COGS)?
What’s included in the cost of goods sold?
Methods of calculating COGS
Example of COGS
The impact on your financial statements
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What is the cost of goods sold?
Simply put, the cost of goods sold (COGS) is the total investment a business makes in producing a product. It includes the labor to produce goods, raw materials, parts used in production, and other direct costs.
COGS is also sometimes referred to as cost of sales (COS).