For manufacturers, “cost of goods sold” (COGS) is the cost of buying raw materials and manufacturing finished products.

For retailers, it’s the cost of obtaining or buying the products sold to customers.

Opening Stock (Beginning inventory) + Purchases – Closing Stock (End Inventory) = COGS

If the company is in a service industry, COGS is the cost of the service it offers.

COGS can help companies work out how much they should charge for their products and services, and the level of sales they need to sustain in order to make a profit.

The price paid for products is particularly crucial to retailers, as it is often their greatest area of expenditure. But all businesses can benefit from an analysis of COGS, as it can highlight ways of improving efficiency and cutting expenditure.