Cost of Goods Sold, or COGS, is the amount a merchandising company paid for the goods sold during a given period. It's important to know that this is not price at which the goods were sold but the price at which they were purchased and the direct cost associated with bringing them to the salesroom and completing the sale. COGS is used in both reporting and analyzing sales of companies of all sizes; it is an important part of the general ledger and also calculating important things such as the break-even point, or the point where the company will have made a net profit of $0.
Calculate beginning inventory by multiplying the number of initial units by the value of the initial units.
Add the cost of units purchased during the specified time period for which COGS is being calculated.
Subtract the value of the ending inventory. This is done in a similar fashion to Step 1; obviously ending inventory cannot be attributed to COGS because it has not been sold yet and is still in inventory.
The product of Steps 1, 2 and 3 is COGS and can be written in equation form as: Beginning Inventory + Purchases - Ending Inventory = COGS.