Many companies miscalculate their profitability by failing to properly classify and allocate both their direct and indirect business costs.
To accurately assess your organization’s gross profit — and ensure your pricing truly generates profit — it’s essential to understand what the Cost of Goods Sold (COGS) means and how to calculate it.
The COGS represents the total of all direct costs incurred in producing a product or service. It’s a key financial metric required for tax reporting and is part of one of the most important financial statements in any company: the Income Statement, also known as the Profit and Loss Statement.
In short, COGS includes the cost of materials, direct labor, manufacturing overhead, and other production-related expenses. It excludes indirect expenses such as selling, general, and administrative (SG&A) costs.
“COGS helps answer the most important question for any entrepreneur or business — large or small: Is your company truly making a profit?”
— Anira Fernandes, CEO & Financial Management Consultant, Spring Management Academy Inc.
Formula to calculate COGS:
Cost of Goods Sold = (Beginning Inventory + Raw Material Purchases – Ending Inventory) + Labor Costs + Manufacturing Overhead
The format of the Income Statement may vary from one company to another. It must reflect the company’s operations and internal management policies while complying with the International Financial Reporting Standards (IFRS) and the Canadian Generally Accepted Accounting Principles (GAAP).
Developed by Anira Fernandes | Spring Management Academy Inc.
