Cost of Goods Sold Calculator

Use the Cost of Goods Sold Calculator to calculate the direct costs related to the production of the goods sold in a company. This includes the material costs used creating the goods/products and the direct labour costs generated from production of the goods/products. The Cost of Goods Sold calculation does not include indirect expenses like supply chain costs, inventory costs or cost of sales.

Determine Cost Of Goods Sold To Monitor Performance Of Your Business

Every company incurs costs to generate revenue that results in profit. If you are running a shoe manufacturing factory, you will have to buy the raw materials, use machinery to put the raw material together, use electricity to run the machines, and pay rent for the place where you perform all these operations. All of these expenses are defined as the cost of goods sold.

Cost of goods sold is the cost that occurs in production. Like all other factors used in the above example, it also includes the cost of labor and any other cost that has a direct relation to the production of goods. Let's explore the definition of COGS and its components.

COGS: Method of calculation and components explained

COGS is referred to as Cost of Sales, when calculating COGS only the direct costs (as explained above) should be considered. All other costs such as inventory cost, publicity costs, and transportation costs are not the part of COGS calculations. You can calculate COGS by using the following formula:

Where:

• Beginning inventory: It's a cash value of a company's inventory at the beginning of a new accounting period. It is also carried forward value from the end of the preceding accounting period.
• Purchases: This is the added inventory during a particular accounting period. This can any cost such as cost of raw material and manufacturing costs, etc. That adds to the cost of inventory.
• Ending Inventory: It is the cash value of the stock left on the shelves at the end of the accounting period. You may calculate the ending inventory adding the beginning inventory value to the new purchases and then subtract the cost of goods.

The method of calculation is a lengthy process and may become tedious at times, but using an online calculator is ideal, let's take a look at how you can use the COGS calculator, designed by iCalculator to make things easier for you.

How & Why to use COGS calculator

As discussed in the method above, you must enter the following three details in order to get the value of COGS from the calculator:

• Beginning Inventory for the selected accounting period.
• Purchases made in the preceding account period.
• Ending inventory value at the end of the preceding accounting period.

On the basis of above inputs the calculator will provide you with the value of COGS.

The COGS calculator is as easy to use as it seems, it is online and saves you time and trouble of going through the manual calculations. The obtained results from the calculator may be used for gross profit margin calculation which is the indication of profitability and success of your business.

COGS is subtracted from the total revenue to determine the gross profit margin, let's take a look at what are the other expenses that are deducted from the gross profit and how they are different from COGS.

COGS VS Other Expenses

• Operating expenses: Similar to COGS operating expenses are as well the costs are expenditure of running a business. However, they both are quite different in nature. Operating expenses include the expenses that are not part of COGS and are not directly related to the production of goods and services such as expenses for payroll, marketing, research & development and insurance.
• Cost of revenue: This is defined as the total cost of manufacturing and delivering a product or service to the customers. This metric is mainly used in the service industry because of its quality to include various costs associated with selling a service.

COGS, in the service industry is generally referred as cost of services because they basically do not sell any goods. The examples of these industries are, law firms, real estate advisory firms etc. However, there are some industries such as airlines and hotels are mainly service providers, but they do sell products too. These companies do maintain inventories for their products and may calculate their expenses separately as COGS.

Even though COGS is an effective measure, it does have it has a major drawback, let's have a look at it.

Limitations of using COGS

COGS method is open to manipulations, it can be under the risk of being manipulated by overstating discounts or returns to suppliers, addition of obsolete inventory, inflated manufacturing costs.

The misrepresentation of COGS such as inflated inventory will result in higher gross profit margin and net income as well. If you own a company or are considering investing in some company, you might want to check its inventory, to get a clearer picture of the revenue and the net profits of the company.