What is Cost of Goods Sold (COGS)?
Cost of Goods Sold, or COGS is derived from the direct costs of producing the goods sold by a company. COGS only includes direct costs such as materials and labor and excludes indirect costs such as sales team costs. The COGS formula is: COGS = Beginning Inventory + Purchases - Ending Inventory. The beginning inventory is what was leftover from the previous cycle, the purchases made at the beginning of the cycle are added to the beginning inventory, and the ending inventory is subtracted from the other two to determine COGS. The COGS formula is used to calculate a company’s gross profit by subtracting it from a company’s revenue.
A non-tangible business, like a software company, would calculate its COGS as all expenses associated with creating and maintaining the software. In addition, instead of referring to COGS, software business would refer to COR (Cost of Revenue).
For more information on this topic, check out this article from our friends at Investopedia.