1. What is the COGS Formula?

The COGS (Cost of Goods Sold) formula calculates the direct costs attributable to the production of goods sold by a company. It includes the cost of materials and direct labor used to create the product.

2. How Does the Calculator Work?

The calculator uses the COGS formula:

Where:

• Beginning Inventory — Value of inventory at the start of the period
• Purchases — Additional inventory purchased during the period
• Ending Inventory — Value of inventory at the end of the period

Explanation: The formula calculates the actual cost of inventory that was sold during the accounting period by accounting for inventory changes.

3. Importance of COGS Calculation

Details: Accurate COGS calculation is crucial for determining gross profit, analyzing business profitability, preparing financial statements, and making informed business decisions.

4. Using the Calculator

Tips: Enter all values in currency format. Ensure beginning inventory, purchases, and ending inventory values are accurate and from the same accounting period.

5. Frequently Asked Questions (FAQ)

Q1: What is included in COGS?
A: COGS includes direct materials, direct labor, and manufacturing overhead costs directly tied to production.

Q2: How does COGS affect gross profit?
A: Gross profit is calculated as Revenue - COGS. Lower COGS results in higher gross profit margins.

Q3: What's the difference between COGS and operating expenses?
A: COGS are direct production costs, while operating expenses are indirect costs like marketing, rent, and administrative expenses.

Q4: How often should COGS be calculated?
A: COGS should be calculated for each accounting period (monthly, quarterly, annually) to maintain accurate financial records.

Q5: Can COGS be negative?
A: No, COGS should not be negative. A negative result indicates an error in inventory tracking or calculation.