To calculate COGS, you will need to first determine the direct costs that are associated with the production of a company's goods or services. These costs may include the cost of raw materials, direct labor, and other direct expenses that are directly tied to the production process. Once you have identified these costs, you can use the following steps to calculate COGS:
Add up the total cost of raw materials that were used to produce the goods or services. This includes the cost of any materials that were directly used in the production process, such as the cost of ingredients for a food manufacturer or the cost of fabric for a clothing manufacturer.Add up the total cost of direct labor that was used to produce the goods or services. This includes the wages and salaries of any employees who worked directly on the production process, such as assembly line workers or production managers.
Add up the total cost of any other direct expenses that were incurred in the production process. This may include costs such as rent for a production facility, utilities, and other expenses that are directly tied to the production process.
Add up the total cost of raw materials, direct labor, and other direct expenses to calculate COGS. This is the total amount that a company spent on the direct costs of production.
For example, imagine that a company called ABC Inc. has the following costs associated with the production of its goods:
Raw materials: $10,000
Direct labor: $20,000
Other direct expenses: $5,000
To calculate ABC Inc.'s COGS, you would add up the total cost of raw materials, direct labor, and other direct expenses to get a total of $35,000. This means that ABC Inc. spent $35,000 on the direct costs of production. Once you have calculated COGS, you can use it to determine a company's gross profit. To do this, you would subtract COGS from the company's total revenue. For example, if ABC Inc. had revenue of $100,000, its gross profit would be $65,000 ($100,000 - $35,000). This means that ABC Inc. earned $65,000 in profit from its sales after accounting for the direct costs of production.
