An abbreviation for the cost of goods sold, COGS are the direct expenses associated with making a product or supplying a service. Typical expenses include direct labor and raw materials. Companies report the cost of goods sold on the income statement.
If a company keeps an inventory, product, or raw materials on hand, then the cost of goods sold needs to account for changes to beginning and ending inventories. The cost of goods sold is calculated as follows:
Goods Available for Sale = Starting Inventory + Additions to Inventory
Cost of Goods Sold = Goods Available for Sale - Ending Inventory
COGS should represent the actual cost to make a product; therefore, it will not include indirect expenses such as research and development or selling, general and administrative expense (SGA). The COGS is an important value because it's often used when calculating efficiency ratios such as gross profit margins.
Cost of goods sold typically appears as the first expense on the income statement, appearing just below revenues (sales).