One of the reasons COGS can be confusing is that businesses sometimes struggle to see a clear line separating direct costs associated with production of a product and indirect costs that don’t have direct bearing on that production. To determine whether something is a direct cost, ask yourself this question: Is there a straight line from a specific cost to the sale of a product? If so, it’s a direct cost.
Direct costs include manufacturing supplies, equipment, and raw materials. Labor costs may also be included, but only if they can be directly tied to the production of goods.
Indirect costs can include things like office supplies, rent, utilities, computers, mobile phones, and accounting and payroll software. It can also include operating costs, including marketing, insurance, and business travel.
Because indirect expenses are not involved in producing goods or america phone number list delivering services, they are not included in COGS.
The cost of goods sold formula
The basic cost of goods sold formula is: Cost of Beginning Inventory + Cost of Purchased Inventory – Cost of Closing Inventory = COGS
So, for example, let’s say you’re looking at your numbers for Q1. You started the quarter with $35,000 in inventory. You purchased an additional $15,000 in inventory to support a new product launch. At the end of Q1, you have $10,000 in inventory left. That’s your COGS.