Cost of Goods Sold (COGS) and The Cost Components That Enter it

In the production activity of a company, it is known for the term COGS or Cost of Goods Sold and is usually known as the cost of goods sold. The following are understanding, benefits, cost components, and how to calculate Cogs!

Cost of Goods Sold (COGS) and The Cost Components That Enter it

As a businessman, have you understood about Cogs? Cogs are part of the production so you need to understand them.

That way, the company's management will run well. Because as is known, COGS will affect the costs and sales that occur.

By definition, COGS is all costs incurred by the company to produce products/services, starting from the manufacturing stage to its distribution.

Definition of Cost of Good Sold (COGS) is

In each production activity of an item known the name or term Cost of Goods Sold (COGS).

Cogs have an understanding, namely all costs incurred by a company to produce a product or service that starts from the process of making products to the product ready to be distributed to the market.

Usually, these calculations cover the cost of raw materials, quiet work directly, and overhead costs. But not including periods (operation) costs such as sales, advertisements, or research and development.

The benefit of the calculation of the cost of goods sold (COGS) is

The company's calculation of the cost of goods provides an estimated company costs accurately.

In addition, there are many other benefits obtained if the company calculates the cost of its sales, including the following:

1. Can determine the selling price

The company generally sets the price of goods and services offered based on production costs, the specifications of its goods, and the number of requests.

That way through the calculation of the cost of goods sold or HPP companies can specifically find out how the selling price is suitable to be charged to the buyer.

2. Tools for monitoring the realization of production costs

If the company has received an order from the order, then the management requires the actual production cost information to fulfill the order.

So cost accounting can be used as a tool to collect production information for each order received.

This is to monitor whether the production process of certain products produces the total cost of production according to the previous or not.

3. Help calculate profit or loss

By calculating COGS or accurate HPP, you can assess the profit or loss to be accepted by the company.

It is possible if the selling price is greater than Cogs, the company will get a profit, whereas if the selling price is lower than Cogs then you will suffer a loss.

Costs included Cost of Goods Sold (COGS) or cost of goods sold are

The following are the cost components included in COGS:

Inventory or supply

Inventory or inventory is a supply of goods originating from stock inventory in the previous period.

To find out the cost of inventory in COGS can be seen from the initial inventory added with the purchase of trading goods when the period is running and then reduced the remaining inventory of the end of the goods.

In a trading company, the amount of inventory of goods sold consists of inventory supplies.

Whereas in manufacturing companies, the amount of supply of goods sold consists of raw material supplies (Raw Materials), inventory of goods during the production process (work in process), and inventory.

Before knowing the amount of supply that has been sold, several other things must be known before, namely as follows:

  • Inventory = is a supply that has been previously available before the process in the period now starts.
  • Purchases (in Trade Companies) = The amount of purchase seen only based on cash expenditure only or more precisely is only seen from the net value (Net Purchase).
  • Production Price (in Manufacturing Companies)
  • Final inventory = is the amount of inventory value that is placed at the end of the period.
  • Inventory used or items provided for sale

Direct Labor Cost)

Direct labor is a cost or wage paid to employees by companies involved directly in the production process of merchandise.

It is called a direct workforce because there are a lot of wages paid to employees depending on how many product units can be produced or wages are paid per day with a calculation per hour.

Power of direct work costs is mostly found in manufacturing companies.


Overhead costs are other costs that arise in addition to inventory costs and direct labor costs. Generally, overhead costs are also called indirect costs.

Overhead costs have a variety of types based on the scale of their business, the type of business, and the type of resources used by a company.

The following types of overhead costs that are often encountered in trading companies and manufacturing which are also Cogs components are as follows:

  • Rental Fees (Generally Building Rental Costs)
  • Machine depreciation and equipment
  • Electricity and water costs in manufacturing companies (factories)
  • Factory Maintenance Costs and Machines (Maintenance)
  • Packaging fee (packaging)
  • Shipping costs
  • Production sample fee
  • Container fee
  • Warehouse fee
  • Building Depreciation Costs (Factory)

How to Calculate Cost Of Good Sold (COGS)

Calculate clean sales

Net sales are one of the company's income elements. The elements found in net sales consist of, gross sales, sales returns, sales, and clean sales.

To find clean sales along with the formula:

Clean Sales = Dirty Sales - Returns Sales - Sales Pieces

Calculate clean purchases

Net purchases as elements in calculating the cost of goods sold. The elements in it are, dirty purchases, purchase transport costs, purchase returns and price reduction, purchase returns, purchase pieces to find clean purchases along with the following formulations:

Net purchase = Purchase - Purchase transport fee - Purchase Return - Pieces of Purchase

Calculate sales production costs

The elements in the cost of goods sold are, the initial foundation of goods, purchases, transportation costs, purchase returns, purchase returns, and price reduction and purchase pieces.

This is the formula for calculating the cost of goods sold:

COGS = Early Double Goods = Clean Purchase - Final Inventory

Calculate profit

This report is to present a source of income and expense of a company during certain periods or sales books. The formula for calculating gross profit, namely:

Net sales - cost of goods sold

Whereas to determine tax profit before tax is:

Gross profit - accumulated costs

An example of calculating the Cost of Goods Sold (COGS) or the cost of goods sold is

The MA factory is a manufacturing company that processes Tapioca flour into crackers.

At the beginning of November, the TJ factory has a supply of raw materials of $ 45, - buying raw material supplies of $ 1500, -

This cracker production is assisted by 10 employees whose monthly costs are $ 1580, - for labor costs.

During the production process, the overhead costs incurred for a month of $ 950, - at the end of November there is the remaining use of raw materials of $ 808, - so what is the large COGS cost of sales at the company Mulya Abadi, here is the explanation:

The first step, raw material used

To find out, the initial balance of raw materials in the first month + purchase of raw materials - the final balance of raw materials.

$ 45 + $ 1500 - $ 808 = $ 737

Second step, production costs

To find out the cost of production, raw materials used + direct labor costs + production overhead costs.

$ 737 + $ 1580 + $ 950 = $ 3267

Third Step, Production Cost Price

To find out the cost of production, the total production costs + initial balance stock goods in the production process - the final balance of goods supplies.

However, because there are no supplies in the production process at the beginning and end of the month, the total cost of production is $ 3267, -

So we can get sales to cost of $ 3267, - with the number of crackers produced is 250,000 pieces.

This means that the production costs of the unity crackers are $ 3267 / 250,000 = $ 0.013068, -

Based on the selling price, which is $ 0.042 per piece and with a production cost of $ 0.013068, - PCS, the profit that should be obtained is $ 0.028932, - per pcs.


To find out the profit obtained by the TJ sales of crackers during the period minus the cost of goods sold.

Sales 250,000 pcs x $ 0.042 = $ 10500 - $ 3267 = $ 7233

Assumed gross profit obtained by $ 7233, - per month. The amount of gross profit has not been cut with loads, such as administration and marketing.

If it is assumed too large load administration and marketing costs of $ 1000, - the net profit obtained by the company is $ 6233, - per month.

Above is a complete explanation of the Cost of Good Sold (COGS), cost components, and how to calculate. Hopefully, the information above is useful.