#Cogs income statement how to#

#Cogs income statement how to#

Let’s take a look at how to calculate cost of goods sold. COGS is then subtracted from the total revenue to arrive at the gross margin. Creditors and investors also use cost of goods sold to calculate the gross margin of the business and analyze what percentage of revenues is available to cover operating expenses.īoth manufacturers and retailers list cost of good sold on the income statement as an expense directly after the total revenues for the period.

The COGS formula is particularly important for management because it helps them analyze how well purchasing and payroll costs are being controlled. The purpose of the COGS calculation is to measure the true cost of producing merchandise that customers purchased for the year. It only includes direct costs for the merchandise that was sold. Notice that this number does not include the indirect costs or expenses incurred to make the products that were not actually sold by year-end. In other words, this is the amount of money the company spent on labor, materials, and overhead to manufacture or purchase products that were sold to customers during the year. Cost of goods sold, often abbreviated COGS, is a managerial calculation that measures the direct costs incurred in producing products that were sold during a period.