What is Cost of Goods Sold (COGS)?

Cost of goods sold are all of the expenses attributed to the production of the goods sold by the company.

Labor costs and cost of raw goods are included in the total calculation of the cost of goods sold. Transportation of goods, or the costs related to the sales force are not included in the calculation.

Formula for COGS calculation

COGS = starting inventory + purchases during the period - inventory at the end of fiscal year

Starting inventory is the inventory that is left over from the previous accounting period. Any additional inventory purchases are added to the already existing inventory. At the end of an accounting period, the goods that are left over are subtracted from the sum of last year's inventory and current year's new purchases, giving you the total COGS.

Any increase in COGS will negatively impact your net profit, as it means that the cost of production / acquisition of new inventory is increasing.