Cogs are wheels that fit together to make machines work.

COGS, however, are the costs contributed directly to the creation of goods a company sells. These can include:

• Raw materials
• Manufacturing costs
• Labor costs
• And R&D.

Distribution, shipping, and the like are not directly related to the actual creation of the product and therefore are not considered COGS in the machine.

To calculate COGS, find the total sum of the initial Inventory and then add material and labor costs. From there, reduce the value by the ending inventory or how much will be sold.