Definition
Cost of goods sold (COGS) is the cost of the stock a business has sold in a period, valued using its inventory costing method.
What is cost of goods sold used for?
Revenue minus COGS gives gross profit, so getting COGS right is essential to knowing real margins. For a trader, COGS is mainly the purchase cost of the goods sold, plus any costs included in inventory, such as inbound freight. It’s recorded when goods leave stock, not when they’re bought. The periodic formula is opening stock + purchases − closing stock.
Gross profit for one month
Example- Revenue: 1,000 units sold
- USD 45,000
- COGS: 1,000 units at an average of USD 32
- USD 32,000
Gross profit
USD 13,000
Calculating COGS only from a month-end count hides margin problems until it’s too late. The cost per unit comes from your inventory valuation method.