The Cost of Goods Sold (COGS) Formula Managerial Accounting is a business term used to calculate the costs associated with producing a product or service. It measures the cost of goods sold against revenue generated through sales and helps companies understand their profitability. This formula is essentially the difference between the cost of the inventory purchased and the value of the inventory sold. By understanding COGS, managers can get a better sense of their cash flow and make informed decisions about investments and other financial obligations.