A cost measure (also known as cost of goods sold or in short COGS) that represents the direct costs of producing the goods sold by a business. For a manufacturing company, it includes the cost of the materials and labor directly used to produce the goods. Indirect expenses, such as distribution costs and sales force costs, are not part of this cost measure. For a service company, the cost of services rendered consists of all the direct costs of the services provided by the company, excluding all indirect costs incurred in relation to the services.

In accounting parlance, cost of goods sold is the carrying value of goods sold during a certain period. These represent the costs associated with particular goods/ services using one of the several accounting methods, including specific identification, first-in first-out (FIFO), or average cost. This cost is reported on an entity’s statement of income and is treated as an expense of the accounting period for which financials are prepared.

COGS are calculated using inventory at the beginning and end of a particular period and purchases of inputs during the same period, as shown in the following formula:

COGS = beginning inventory + additions or purchases during the period – ending inventory