Cost of Goods Sold” or “COGS” is the direct costs associated with the sale of a company’s products or goods. Cost of Goods Sold includes direct labor and material costs but excludes indirect costs such as marketing and distribution costs.

The general formula for calculating COGS for a particular operating period is:

COGS = (Inventory at beginning of such period) + (Purchases during such period) – (Inventory at end of such period).

Additionally, COGS factors into a company’s Gross Profit calculation for a particular operating period, as follows:

Gross Profit = Net Sales – COGS.