The cost of goods sold, also known as direct costs, is the net expense incurred in producing the goods sold by the company. These include material and labor costs. Other costs, such as distribution and sales, are excluded and are referred to as indirect costs.
The formula for calculating COGS:
Starting inventory refers to the leftover goods from the previous sales period in the above formula, and ending inventory refers to the leftover goods after the current sales period. The balance sheet’s inventory section includes the ending inventory for each accounting year.
The final inventory is calculated by subtracting the total of materials purchased during the current period and previous stock. This figure represents the COGS. An increase in COGS will have a negative impact on the company’s net profit because it will increase the cost of production or inventory acquisition.