Definition

Cost of goods sold (COGS) includes all direct costs incurred to create the products a company offers. Most of these are the variable costs of making the product—for example, materials and labor—while others can be fixed costs, such as factory overhead.

Examples of costs generally considered COGS include:

• Raw materials
• Items purchased for resale
• Freight-in costs
• Purchase returns and allowances
• Trade or cash discounts
• Factory labor
• Parts used in production
• Storage costs
• Factory overhead

Formula

(Beginning Inventory + Purchases) – Ending Inventory = COGS