The Cost of Goods Sold (COGS) measures the "direct cost" incurred in the production of any good.
Direct labor costs, material costs, and factory overheads are all directly proportional to revenue.
As revenues increase, so do production costs. COGS appears on the income statement right after sales revenue. Gross profit is calculated by subtracting COGS from revenue.
Calculating COGS involves finding the "true cost" of goods sold during a period. It does not reflect the cost of goods that are purchased in the period and not sold or just kept in inventory. Management and investors can use it to monitor the performance of the business.
To know the cost of goods sold, you need to know the cost of materials and outputs cost. The cost of material is calculated by noting the amount it takes to acquire materials used in product manufacture. And Cost output is the total cost of sold goods.
Cost of Goods Sold is calculated using the following:
Cost of Materials & Inventory – Cost of Outputs
It means you'll remove the cost of outputs from the cost of materials. This helps to determine if the cost paid for production is commensurate with the selling amount.