COGS is beginning inventory plus purchases, minus ending inventory.
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Add beginning inventory to purchases made during the period, then subtract ending inventory. A business that starts a quarter with $50,000 in inventory, buys $200,000 more in stock, and ends the quarter with $40,000 in inventory has a COGS of $50,000 plus $200,000, minus $40,000, which is $210,000. The logic is straightforward: whatever inventory value did not end the period sitting on the shelf must have been sold.
COGS feeds directly into gross profit and gross margin, since gross profit is simply revenue minus COGS. Tracking COGS accurately each period is what makes those two downstream numbers meaningful rather than guesswork.
COGS should include the direct costs of producing or acquiring what was actually sold: the wholesale or manufacturing cost of the goods, direct labor tied to production, and freight-in costs to get inventory into your warehouse. For a retailer or ecommerce seller, that usually means the cost paid to a supplier or manufacturer plus any inbound shipping.
Indirect costs like marketing, sales commissions, warehouse rent, and outbound shipping to customers are generally kept out of COGS and tracked separately as operating expenses. Mixing the two together understates gross margin and makes it harder to see whether pricing and product costs are actually healthy on their own.
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