Cost of Goods Sold

This is the total of all costs used to create a product or service (this product has to have been sold). To put it another way, this is the direct cost associated with creating a product.

What's included in this (generally speaking)?

  • Labor
  • Materials
  • Overhead

What's the formula?
Cost of Goods Sold = Beginning Inventory + Purchases - Ending Inventory

Why is this important?
Knowing the cost of goods sold is another indicator of how healthy or unhealthy and organization/business is financially speaking. This figure helps a company to determine whether or not a product is being produced efficiently and if the product itself is actually profitable. In other words, this is very important, make sure that you know this number.

What to remember? We've said many times recently that numbers don't tell the whole story and they don't, but having the right numbers can make all the difference. Also, just because a product is needed or seems to bring in a lot of cash doesn't mean that a company should keep producing it.