What is Cost of Goods Sold (COGS)?
Cost of Goods Sold (COGS) is the direct cost of producing the goods sold during a period, including raw materials, direct labour, and manufacturing overhead.
COGS Calculation
COGS = Opening Stock + Purchases (or Manufacturing Cost) − Closing Stock. For ERPNext manufacturing companies, COGS = raw material cost + labour (job card time × rate) + overhead allocated to the work order. The valuation method (FIFO or Moving Average) affects COGS when input costs fluctuate.
COGS vs Operating Expenses
COGS appears above the Gross Profit line — it's the direct cost of what was sold. Operating expenses (salaries of admin staff, rent, marketing) appear below the Gross Profit line. This distinction is critical for accurate gross margin analysis by product or customer.
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