![]() What is Cost of Goods Sold (COGS)Ĭost of Goods Sold (COGS) calculates the total cost incurred in getting the product ready for sale in the market. Let us first look at the accepted definition of COGS. You can quickly find out the overall inventory levels at any point in time, the total amount you have spent procuring all the stock for a particular item, and know how much you spent processing, shipping, or manufacturing the entire inventory.Īs we shall see later, this aggregate information is used in the formula for calculating the Cost of Goods Sold for both manufactured items and traded items and is a lot easier to work with. It is a lot easier to work with aggregate numbers. Knowing and using the formula makes it easy for you to get the correct cost numbers without doing a manual calculation for each item purchased. This is why you need the formula to calculate COGS. ![]() Remembering or finding out the costs associated with every stock item in your warehouse would be difficult and, might I add, a waste of your time. These costs could be different for each item in your inventory. And there is no way you'd remember what that specific price was.Īlso, procuring or manufacturing the items & goods would incur additional costs, e.g., shipping, freight, labor, processing, duty, and handling costs. The last item you sold may have been purchased at a different price than the other stock for the same product six months ago. This is the basis of inventory management. ![]() So inventory is either being procured, processed, or being shipped out. To answer this, let's see how a business like yours might be managing goods & inventory in real life.Ī trading company would procure the required stock from a few trusted suppliers and then ship it to interested buyers.Ī manufacturing company would procure the raw materials from their suppliers before processing the individual items to create their end product. Why can't you just look up the last vendor bill and check the purchase price? Why You Need to Calculate Cost of Goods Sold To know this number, though, you'd need to know the Cost of Goods Sold formula.īut before we jump into formulas and calculations, here is a question for you. Same thing with settlement discount granted - regular expense - separate from gross profit calc.How do you know your business is not bleeding money when you make a sale? One way is to ensure that the selling price is more than the cost of the goods sold, aka COGS. Please help with calculating cost of sales and gross profit: Inventory (1 March 2013) - 100,000 sales - 150,000 purchases - 80,000 sales returns - 1,200 purchases returns - 2000 freight charges on purchases - 650 freight charges on sales - 1700 settlement discount granted - 350 closing inventory - 40,000 What is the cost of sales figure and gross profit? Cost of Sales = Opening Inventory + Total Purchases - Closing Inventory Total Purchases = Purchases + Carriage on purchases - Purchase returns Therefore: Cost of Sales = Opening Inventory + (Purchases + Carriage on purchases - Purchase returns) - Closing Inventory = 100,000 + (80,000 + 650 - 2000) - 40,000 = 138,650 Sales = Sales - Sales Returns (Freight on sales not included in this calculation or in the calculation of gross profit - not counted as a selling expense but just as a regular expense. FIFO, LIFO and Weighted Average Cost MethodsĬlick here to check out more Full Accounting Questions and AnswersĬomments for What is the Cost of Goods Sold Formula?Ĭost of Sales and Gross Profit Question by: Anonymous.Sales, Cost of Goods Sold and Gross Profit.Best, Michael Celender Founder of Accounting Basics for Students Scroll down further below for more questions and answers on the cost of goods sold formula, as well as related tutorials. The full total of purchases (which would go in the cost of goods sold formula) would thus be: Total Purchases = Purchases (purchase costs) + Carriage + Import duties - Purchases Returns See the full lesson on Sales, Cost of Goods Sold and Gross Profit for a full explanation of the cost of sales formula and gross profit. Or to spell it out here: Cost of Goods Sold = Opening Inventories + Purchases - Closing Inventories The Purchases in the above formula actually has various sub-components, which they love to test you on in accounting tests and exams. What is the cost of goods sold formula? A: The cost of goods sold formula (also known as the cost of sales formula or equation) is: ![]()
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