When financial statements are presented, the amount for COGS is reflecting the inventory that was sold over the course of the period. Additionally, it might not apply to others.ĬOGS= Beginning Inventory + P – Ending Inventory
The calculation for COGS includes ending inventory across two separate periods, but in practice, inventory is only one component of COGS for certain businesses. Modern-day accounting and Enterprise Resource Planning ( ERP) systems have sophisticated means of tracking inventory and other raw materials in order to calculate COGS in real-time. Finally, gross profit is reduced by estimated variable expenses to arrive at a net income estimate. They do this by using COGS to calculate gross profit margin, which is then used, in conjunction with revenue expectations to arrive at expected gross profit. Because it represents direct production costs, analysts regularly review COGS over time to identify if a business is becoming more efficient and broadening its gross profit potential.Īdditionally, it is used by financial analysts to estimate various financial metrics, including net income.
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How To Interpret COGSĪs we already mentioned, COGS is an important financial metric that analysts use in a variety of ways. Because of this, COGS is considered a profitability metric as well as an accounting term.Īny expense not directly related to the production of a good or service is excluded from COGS and is instead presented in the most relevant line item on the income statement. COGS is an important financial metric that is subtracted directly from gross revenue to arrive at gross profit. What Is Cost Of Goods Sold (COGS)?Ĭost of goods sold is a term used to categorize the cost directly related to producing a good or service. In this post, we will cover what COGS is, how to interpret it, how to calculate COGS, and how it is impacted by various cost methods. It is required to be presented in the financial statements under US GAAP and is widely used by analysts and investors to monitor the profitability and efficiency of a business, especially over time. Cost of goods sold (COGS) is an important accounting term to familiarize yourself with.
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