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How much inventory did you use? The answer is the cost of goods sold, which in this example is $30,000 ($100,000 starting balance + $25,000 in received purchases – $95,000)ĬOGs are critically important to a business as COGs directly impact a business’s profit margin and profit dollars. On January 31st, you have a total inventory balance of $95,000.Throughout January, you’re business purchases and receives $25,000 of inventory, while simultaneously selling through some of your inventory on the shelf to fulfill customer orders.On January 1st, your business has $100,000 of inventory on the shelf.Let’s apply the above variables to a specific calendar month (January). The easiest way to understand the formula is to see it in action. The total purchases over a given period.The beginning or starting inventory balance.In its simplest form, the cost of goods formula has three variables:
![formula for cogs formula for cogs](https://www.netsuite.com/portal/assets/img/business-articles/inventory-management/formula-cogs-2.jpg)
Let’s start high level and cover the cost of goods sold formula. Let’s dive into everything you need to know about COGs. The good news is, the cost of goods sold formula is easy to understand. Understanding the cost of goods in a business you run, or a business you plan on investing in, is crucial. After all, Revenue – Cost of Goods Sold (also known as COGs), equals the gross profit of the business. Whether you’re taking a basic accounting course, or running a business, the cost of goods sold figure is one of the most important lines on the entire income statement.