Cost of Goods Sold (COGS) is the direct costs of producing the goods a company sells, including materials and labour but excluding overheads. Accurate COGS calculation determines gross profit, informs pricing strategies, and ensures reliable financial reporting for Irish businesses.
Cost of Goods Sold is the direct cost attributable to the production of goods or services that a company sells during a specific accounting period. This figure appears on your income statement immediately below revenue, providing the starting point for calculating gross profit. For Irish businesses, accurately tracking Cost of Goods Sold ensures compliance with accounting standards and supports informed pricing decisions.
When calculating Cost of Goods Sold, you include expenses like raw materials, direct labour, and manufacturing supplies used in production. Indirect costs such as administrative salaries or marketing expenses are excluded and treated separately as operating expenses. The formula—beginning inventory plus purchases minus ending inventory—reveals how efficiently your production converts inputs into sellable products.
Understanding Cost of Goods Sold helps you assess product profitability and operational efficiency. High Cost of Goods Sold relative to sales signals potential issues like supplier price increases or production inefficiencies that require attention before they erode margins.
To calculate Cost of Goods Sold, start with your beginning inventory value from the previous financial year end. Add the cost of goods purchased or manufactured during the period, then subtract the ending inventory value. This net figure represents the actual cost of inventory sold.
Inventory valuation methods like FIFO (first-in, first-out) or weighted average impact the calculation. Irish companies must consistently apply their chosen method across periods to comply with accounting standards and Revenue requirements for corporation tax.
Precise tracking prevents discrepancies that could distort profitability metrics used in due diligence.
Cost of Goods Sold is subtracted from revenue to determine gross profit, revealing how much money remains after covering direct production costs. This key metric shows your core business efficiency before overheads, guiding pricing and cost control strategies.
Investors scrutinise gross profit margins during due diligence, as declining trends suggest competitive pressures or rising input costs. Maintaining healthy margins supports sustainable growth and attractiveness for equity financing.
Cost of Goods Sold encompasses direct materials, direct labour, and manufacturing overheads directly tied to production. Freight-in for raw materials qualifies, whilst selling or administrative costs do not. Service-based companies adapt the concept to direct service delivery costs.
Cost of Goods Sold calculation relies on accurate inventory records. Overstated ending inventory reduces Cost of Goods Sold artificially inflating profits, whilst understatements do the opposite. Regular stock takes and robust systems prevent discrepancies affecting financial statements.
Cost of Goods Sold covers direct production costs, whilst operating expenses include indirect costs like rent, salaries, and marketing. Separating them on the income statement highlights operational efficiency distinct from core production performance.
Yes, Cost of Goods Sold composition differs across sectors. Retail focuses on purchase costs, manufacturing includes labour and materials, whilst software firms treat direct development costs similarly. Irish VAT rules influence treatment for taxable supplies.
