A company’s cost of goods sold (COGS) largely depends on whether it is a manufacturer or a reseller. 

A manufacturing company’s COGS will include all those costs directly tied to producing the finished goods. These costs include raw materials, direct labor, an allocation of factory overhead, shipping, and other related expenses. The COGS figure will generally not include indirect overhead costs like legal and professional fees, general and administrative expenses, marketing, depreciation, interest expense, and rents. 

For example, Company A is a shoe manufacturer. It purchases raw materials and hires workers to make the shoes. Company A’s inventory would consist of raw materials, work in process (WIP), and finished goods. 

Unlike a manufacturing company, a reseller does not manufacture its products. Instead, it purchases finished goods from other companies and resells them as part of its business. The reseller won’t have inventory accounts for raw materials or work in process. For example, a local grocery store buys its inventory from third-party suppliers and does not need to modify the product. The grocery store places the products on its shelves for sale to customers. 

There are several ways to express the formula for COGS.

COGS = Beginning Inventory + Costs of Goods Manufactured – Ending Inventory

COGS = Beginning Inventory + Purchases – Ending Inventory

Let’s look at an example for a grocery store business.

Company A operates a local supermarket. The Company purchases produce, boxed goods, beverages, and various other items to put on its shelves. Company A wants to calculate its COGS for the month of August 2023. The company’s inventory figures and purchases are the following:

Inventory at July 31, 2023: $2,600
Inventory purchases in August: $45,000
Inventory at August 31, 2023: $3,900

COGS = 2,600 + 45,000 – 3,900
COGS = 43,700

U.S. Tax Compliance and Reporting

Companies filing U.S. tax returns will reconcile their COGS and inventory figures on Form 1125-A (Cost of Goods Sold). A sole proprietorship completing a Schedule C (Profit or Loss From Business) reconciles its inventory and COGS in Part III.