Cost of Goods Sold (COGS) refers to those costs which are directly associated with production of goods or services. For manufacturing companies, amount of raw materials used in the manufacturing of goods is the cost of goods sold. It does not include any indirect cost like rent, wages, utilities etc.
Formula for the calculation of Cost of Goods Sold (COGS)
Cost of goods sold is calculated by adding opening stock and purchases made during the financial year and then subtracting the amount of closing stock.
Cost of goods sold = (Opening stock + Purchases) – Closing stock
ABC ltd has total stock of INR 1,00,000 on 1st April 2016. During the financial year 2016 to 2017, the company purchased raw material of INR 90,000 and ended up with stock worth of INR 1,10,000 on 31st March 2017.
COGS (for the financial year 2016 – 17) = (1,00,000 + 90,000) – 1,10,000 = INR 80,000