Also known as COGS, it is the direct cost involved in producing the goods sold by a company, including materials and labour. However, it excludes indirect expenses such as distribution, marketing and sales. The direct costs of producing the goods are entered as expenses in the company’s books only at the time that the goods are actually sold. A common formula to determine COGS is:
Beginning inventory + purchases – ending inventory = cost of goods sold
So, if a business has R20 million in inventory, makes R4 million in purchases and ends with R18 million in inventory, the cost of goods for the period would be R6 million (R20 million + R4 million – R18 million)
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