Cost of goods sold (COGS) is the cost assigned to the goods a business sells during a reporting period. For purchased merchandise, that can include qualifying acquisition costs. For manufactured goods, it can also include conversion costs such as direct labor and production overhead under the applicable policy.
Buying inventory, paying a supplier and recognizing COGS are different events. A buyer influences purchase quantities and costs; finance determines the cost assignment, classification and recognition in the accounts.
The simplified COGS formula
For a trading-stock example with no separately classified losses, transfers or other adjustments:
COGS = opening inventory at cost + net inventory purchases − closing inventory at cost
Use consistent dates, units, ownership scope and valuation. Net purchases should reflect relevant returns, allowances and acquisition charges under the accounting policy. It is not simply the total of supplier payments during the period.
A production business needs the relevant raw-material, work-in-progress and finished-goods flows as well as conversion costs. Do not apply a merchandise-purchases-only formula to a factory and assume it captures the full result.
A worked example
Assume a fictional retailer starts a month with $20,000 of inventory at cost. It acquires $15,000 of goods, receives $1,000 of purchase returns or allowances, and incurs $600 of eligible inbound freight. Closing inventory is $18,000 on the same cost basis. There are no other inventory movements or losses in this example.
Net inventory purchases = $15,000 − $1,000 + $600 = $14,600
Goods available at cost = $20,000 + $14,600 = $34,600
COGS = $34,600 − $18,000 = $16,600