How to Calculate the Cost of Goods Sold
In investing, the cost of goods sold, or COGS (also referred to as cost of sales), refers to how much money a company spends in producing the goods it sells. In other words, it tells you how much it costs for a company to buy raw materials and turn those raw materials into the products it sells. Here's how to calculate it.
Other People Are Reading
Instructions
-
-
1
Calculating the cost of goods sold is actually not necessary from an investor's standpoint--any public company will do this for you on its income statement. You can find the income statement on a company's annual report, or 10-K. However, you may wish to calculate it yourself at some point, either for your own business or to double-check someone else's accounting. Here's how to do it.
-
2
The most basic way to calculate cost of goods sold looks like this: Beginning Inventory + Total Purchases Made - Ending Inventory.
-
-
3
Here's an example. Let's say Bob's Widget Company begins its fiscal year with $200,000 in inventory. Over that fiscal year, it makes $300,000 in purchases. It ends the fiscal year with $150,000 in inventory. So the math looks like this: $200,000 + $300,000 - $150,000 = $350,000. The cost of goods sold for Bob's Widget Company was $350,000 for that fiscal year.
-
4
COGS is important for a couple of reasons. First, it can be used to calculate the gross margin, which is the amount of money a company has left over in profit after it pays for the raw materials used to produce its goods. To find gross margin, subtract COGS from total revenue, then divide the result by total revenue. The resulting percentage tells you how much money the company keeps from every dollar of merchandise it sells. COGS is also important because it shows how raw materials costs can impact a company's bottom line. For example, a sharp spike in the cost of gasoline could increase COGS significantly if a company uses a lot of gasoline in manufacturing its products.
-
1
Resources
- Photo Credit www.sxc.hu
