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In financial accounting, cost of goods sold (COGS) includes the direct costs attributable to the production of the goods sold by a company. This amount includes the materials cost used in creating the goods along with the direct labor costs used to produce the good. It excludes indirect expenses such as distribution costs and sales force costs. COGS appears on the income statement and can be deducted from revenue to calculate a company's gross margin. COGS is the costs that go into creating the products that a company sells; therefore, the only costs included in the measure are those that are directly tied to the production of the products. For example, the COGS for an automaker would include the material costs for the parts that go into making the car along with the labor costs used to put the car together. The cost of sending the cars to dealerships and the cost of the labor used to sell the car would be excluded. The accounts included in the COGS calculation will differ from one type of business to another. The cost of goods attributed to a company's products is expensed as the company sells these goods. There are several ways to calculate COGS but one of the basic ways is to start with the beginning inventory for the period and add the total amount of purchases made during the period, and then deducting the ending inventory. This calculation gives the total amount of inventory (the cost of this inventory) sold by the company during the period. Therefore, if a company starts with $10 million in inventory, makes $2m in purchases and ends the period with $9m in inventory, the company's cost of goods for the period would be $3m ($10m + $2m - $9m).
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