COGS = Beginning Inventory + Purchases During Period – Ending Inventory
Include the cost of raw materials used
Include direct labor tied to production
Include direct manufacturing overhead
Include freight-in or shipping costs to receive inventory
Include packaging directly tied to the product
Exclude selling, general, and administrative expenses
Exclude marketing costs
Exclude distribution costs not part of production
Exclude office salaries and administrative expenses
Use inventory counts to determine beginning and ending inventory
Add all inventory purchases made during the period
Subtract unsold inventory remaining at the end of the period
For service businesses, COGS may include direct labor and direct service costs only