Cost of goods sold
The cost of goods sold, or COGS, is the cost of the inventory or services that was sold.
For companies that sell physical items, the cost of goods sold is the sum of any purchases made during the accounting period plus the difference between beginning and ending inventory. It is also referred to as Cost of Sales.
<math>COGS = Beginning\ inventory + Purchases\ made - Ending\ inventory</math>
For companies that sell services, the "cost of goods sold" is the cost of providing those services.
COGS and inventory
COGS is rarely the actual cost spent to acquire inventory items a, b, and c. That can only be determined if the cost of every individual widget is tracked -- quite impossible for all the washers or screws sold by Home Depot, for instance.
Instead, COGS is determined more usually from the value of inventory at the beginning of the accounting period, the amount of money spent to purchase new inventory, and the value of inventory at the end of the period. The values of the inventory at the beginning and end of the period depend on the accounting method used. For instance, if a company starts a financial period (e.g. a quarter) with $12 million as inventory, spends $4 million during the quarter, and ends the period with $11 million, then the COGS would be $4 + ($12 - $11) = $5 million.
These numbers can be obtained from the balance sheet and the cash flow statement. Beginning and ending inventory are on the balance sheet, while the cash flow statement shows how much was spent in purchasing new inventory. in the section on operating cash flows.
Costs includes not only the cost of materials (including shipping charges for delivery charged to the purchasing company), but also the labor to assemble items into the products the company actually sells. Cost includes all costs at a manufacturing site--including security costs, insurance, and property taxes, but excludes overhead/SARE costs.
In a period of rising prices (the most common situation), for LIFO (last in, first out), COGS will be higher than for FIFO (first in, first out). Thus, LIFO would give an accurate picture of the actual costs today for what is being sold.
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