What is Cost of Goods Sold (COGS)?
Cost of goods sold (COGS) is the direct cost attributable to the inventory items sold during a period, including raw materials, direct labor, and manufacturing overhead, deducted from revenue to compute gross profit.
How It Works
- Formula: COGS = opening inventory + purchases – closing inventory.
- Includes raw materials, direct labor, and manufacturing overhead.
- Excludes selling, general, and administrative expenses.
- Measured under FIFO, weighted average, or specific identification (IAS 2).
Saudi Context
Saudi VAT-registered businesses must align their COGS calculation with the same inventory method used for VAT input tax recovery. ZATCA accepts FIFO and weighted average; LIFO is prohibited under IFRS and Saudi tax regulations alike.
Example
A Saudi retailer has opening inventory SAR 200,000, purchases SAR 800,000, and closing inventory SAR 250,000. COGS = 200,000 + 800,000 – 250,000 = SAR 750,000.