What is the cost of goods sold?
Cost of all items together at the time of production of goods or services is known as Cost of goods sold.
All the materials that are used to make these goods even if it is a small thing, all is included in this cost at the time of selling.
Some items included in cost of goods sold:
These are the costs that range from production of goods to selling. All the costs incurred at the time of production of goods are counted in this cost.
Cost of raw materials + Cost of resale items + Cost of items used to make a product or good + Labour cost + Supplier cost + Overhead costs like manufacturing + Transport cost + Indirect cost like distribution + Container cost.
- Cost of goods sold is the actual cost of goods to a distributor, retailer, manufacturer.
- It is deducted from sales revenue to calculate a gross profit of the company.
- COGS is an expenditure which is found in an income statement( profit and loss statement)
- Its other name is “cost of goods sale”.
How to calculate cost of goods sold?
The way to calculate cost of goods:
- Cost of goods sold = (Inventory at the beginning of the year + cost of goods sold) – inventory at the end of the year.
- Inventory at the beginning of the year: It is the beginning inventory which is the previous year of ending inventory. So that beginning inventory has to be counted in a company’s stock.
- Cost of goods sold: It includes all the cost incurred during the year for production of any product.
- Inventory at the end of the year: It is the ending inventory whose value count at the end.
If we talk about the balance sheet, the balance sheet has a current asset side in which there is a place where an item is called inventory. The products which were not sold at the end of the year, those are deducted from beginning inventory. The balance sheet always represents the financial position of the company at the end of the financial period, so in the balance sheet inventory under the current asset is the ending inventory. So that beginning inventory has to be counted in a company’s stock.
Is Cost of goods sold an asset or liability?
Cost of goods sold is neither an asset nor a liability, it is an expense which is incurred during a year for production of goods. How much does a business have to spend to make a product, all of its count in cost of goods sold.
- Product pricing: If you know about COGS, you can fix your product price according to your business expenses and from this, you can estimate how much your product price needs to increase and decrease. You can also estimate your net income and gross income.
Net income: Revenue – COGS – Expenses
Gross income: Gross revenue – COGS
- Inventory methods: There are three inventory methods including FIFO, LIFO, Average. You can change your COGS throughout the accounting period with these inventory methods.
- FIFO: Under the FIFO, You sell those goods who have low price with high demand and record in low COGS.
- LIFO: Under the LIFO, you sell those goods who have high prices with high demand and record in high COGS.
- Average: You can take the average of your inventory to estimate COGS. It is better than FIFO and LIFO.
- Operating Expenses: Operating expenses and COGS are both expenditure for business but there is little bit difference in cost such as operating cost include rent, payroll, insurance cost, utilities, marketing and sales, office furniture cost, etc but these cost does not include in COGS.
To keep track of the cost of goods sold, many company owners can use accounting software for better calculations. Many accounting software are available on the internet with many versions.