Determine beginning inventory
Add purchases made during the period
Add freight-in and other direct acquisition costs
Subtract purchase returns and allowances
Subtract ending inventory
Use the formula: COGS = Beginning Inventory + Purchases + Freight-In – Purchase Returns and Allowances – Ending Inventory
For manufacturers, use the formula: COGS = Beginning Finished Goods Inventory + Cost of Goods Manufactured – Ending Finished Goods Inventory
Include only direct costs tied to producing or acquiring the goods sold
Exclude operating expenses, selling expenses, and administrative expenses