Start with beginning inventory
Add purchases made during the period
Add direct costs of production, if applicable
Subtract purchase returns and allowances
Subtract purchase discounts
Subtract ending inventory
Use the formula: Beginning Inventory + Purchases + Direct Costs – Returns – Discounts – Ending Inventory = Cost of Goods Sold
For manufacturers, use: Beginning Raw Materials + Raw Materials Purchases – Ending Raw Materials = Raw Materials Used
Add direct labor and manufacturing overhead to raw materials used to get cost of goods manufactured
Use cost of goods manufactured, plus beginning finished goods inventory, minus ending finished goods inventory, to get cost of goods sold
Verify all inventory values are based on the same accounting period and valuation method