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What is Cost of Goods Sold or COGS?

COGS – Cost of Goods Sold

The Cost of Goods, also known as COGS or Cost of Sales, is the actual cost of the commodities sold to customers. It involves both costs of the material used for production and direct labour cost. The cost of goods sold (COGS) is shown in the income statement. Sales are either recorded in a company’s cash book or the sales book.

It includes;

  • Raw material, Storage, Freight or Shipping Charges
  • Factory Overheads
  • Direct Labor Cost

 

How to Calculate the Cost of Goods Sold (COGS)?

COGS =  Opening Stock + Purchases – Closing Stock

Also, COGS = Net Sales – Gross Profit

 

Example 1

Opening Stock of a business is valued at = 2,500,000

Purchases = 1,000,000, Closing Stock valued at = 1,500,000

COGS = OS + P – CS

= 2,500,000 + 1,000,000 – 1,500,000

= 2,000,0000

 

Example 2

Net Sales = 2,000,000, Gross Profit = 1,000,000

COGS = Net Sales – GP

= 2,000,000 – 1,000,000

= 1,000,000

 

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