What is the formula for Cost of Goods Sold (COGS)?

The standard formula for Cost of Goods Sold is: COGS = Beginning Inventory + Net Purchases during period - Ending Inventory.

What expenses are included in COGS?

COGS includes direct materials, raw parts, merchandise purchased for resale, direct manufacturing labor, and freight-in shipping costs. It excludes indirect operational expenses like office rent, marketing, administrative salaries, and legal fees.

Why is COGS important for business taxes?

COGS is an allowable business expense deducted directly from gross revenue on IRS tax returns (Schedule C for sole proprietors, Form 1120 for corporations). A higher COGS reduces taxable business income, lowering your overall tax liability.

2026 GAAP & IRS Accounting Metric

Cost of Goods Sold (COGS) Calculator

Calculate your exact Cost of Goods Sold, deduce gross profit and gross margin percentages, and evaluate inventory turnover velocity across retail, e-commerce, and manufacturing.

Total Sales Revenue ($)

Beginning Inventory ($)

Value at start of period

Net Inventory Purchases ($)

Merchandise bought during period

Freight-In & Shipping ($)

Shipping to receive inventory

Ending Inventory ($)

Value at end of period

Inventory Turnover & Cash Flow Health

Inventory Turnover Ratio

2.80x / year

Times stock is sold & replaced

Days Sales of Inventory (DSI)

130 days

Average days to sell out inventory

Cost of Goods Sold (COGS)

$133,000

Represents53.2%of total sales revenue

Gross Profit46.8% Margin

$117,000

Total Sales Revenue$250,000

Less: Total COGS-$133,000

Gross Profit$117,000

Average Inventory Value$47,500

IRS Tax Deductibility

COGS is an above-the-line deduction deducted directly on IRS Schedule C (Part III) or Form 1120, directly reducing taxable gross profit before standard business deductions.

Frequently Asked Questions

What is NOT included in COGS?

Operating expenses (OPEX) are strictly excluded from COGS. This includes marketing and advertising costs, administrative payroll, office lease payments, legal and accounting fees, and software subscriptions not directly tied to production machinery.

What is a healthy inventory turnover ratio?

For most retail and e-commerce companies, a healthy inventory turnover ratio is between 4x and 8x per year (selling through inventory every 45 to 90 days). A higher turnover indicates rapid sales and efficient inventory management, while a low turnover suggests excess capital locked up in unsold goods.

Related Financial Tools

Interconnected calculations to validate your business economics

View all 74 models →

Margin Math

Profit Margin & Markup Calculator

Compute gross, operating, and net profit margins and distinguish markup vs margin.

Open Calculator

Unit Economics

Break-Even & Target Revenue Calculator

Find minimum sales volume and margin of safety to absorb fixed overhead.

Open Calculator

Pricing Math

Markup vs Margin Calculator

Calculate cost markup %, target selling prices, and compare markup vs gross profit margin.

Open Calculator

Unit Economics

Contribution Margin & CVP Calculator

Calculate unit contribution margin, margin ratio %, break-even unit volume, and operating leverage.

Open Calculator