How is COGS calculated and what factors influence it?

• A. COGS equals Beginning Inventory plus Ending Inventory minus Purchases.
• B. COGS equals Beginning Inventory plus Purchases plus Ending Inventory (adjusted for freight and other costs).
• C. COGS = Beginning Inventory + Purchases − Ending Inventory (adjusted for freight and other costs). Influenced by inventory methods (FIFO, LIFO, Weighted Average), purchase prices, and inventory counts.
• D. COGS equals Sales minus Gross Profit.

Answer: (C)

COGS measures the cost of the goods actually sold during the period. It’s driven by what you started with in inventory, what you purchased during the period, and what you still have on hand at the end. The calculation is COGS = Beginning Inventory + Purchases (including freight-in and other costs that become part of the cost of goods) − Ending Inventory. In practice, you often think of “cost of goods available for sale” minus ending inventory to get COGS, with freight and other costs embedded in the cost of purchases.

The factors that influence COGS include the inventory method used to value and move costs to COGS: FIFO, LIFO, and weighted average. These methods determine which unit costs flow into COGS versus ending inventory, especially when prices change. Purchase prices directly affect the cost basis of the goods, and the ending inventory count (the physical count) sets the amount subtracted from that cost pool to arrive at COGS.