![]() If 1,000 units of the product were purchased but the inventory decreased by 100 units then the cost of 1,100 units will be the cost of goods sold. For example, if 1,000 units of a company's only product were purchased but its inventory increased by 100 units, then the cost of 900 units will be the cost of goods sold. One way to calculate a retailer's cost of goods sold is to begin with the cost of the goods it had purchased during the accounting period and then adjust it for the change in inventory. Examples of Calculating the Cost of Goods Sold When the cost of goods sold is subtracted from net sales, the result is the company's gross profit. In essence, the cost of goods sold is being matched with the revenues from the goods sold, thereby achieving the matching principle of accounting. The cost of goods sold is reported on the income statement and should be viewed as an expense of the accounting period. The cost of goods sold is the cost of the products that a retailer, distributor, or manufacturer has sold. COS in a service company typically includes labor associated with delivering the service.What is the cost of goods sold? Definition of Cost of Goods Sold What about the wages of the plant supervisor?Īre all of these directly related to the manufacturing of the product? Or are they operating expenses, like the cost of the HR manager? There’s the same ambiguity in the service environment.What about the salary of the person who manages the plant where the product is manufactured?.The salary of the human resources manager in the corporate officeĪh, but then there’s the gray area-and it’s enormous.The cost of supplies used by the accounting department (paper, etc.). ![]() The cost of the materials that are used to make the productĪnd plenty of costs are definitely out, such as:.The wages of the people on the manufacturing line.In a manufacturing company, for instance, the following costs are definitely in: The accounting department has to make decisions about what to include in COGS or COS and what to put somewhere else. If you suspect that rule is open to a ton of interpretation, you’re on the money. (Excerpts from Financial Intelligence, Chapter 8 – Costs and Expenses) The top part of our income statement (with our COGS line) would look like this: All other expenses not directly related to the product or service goes under a category called Operating Expenses such as your receptionists’ or accountants’ salary. There are more line items that would be included in COGS, but you get the idea. These costs are directly related to our service and fall into the Cost of Goods Sold (COGS) line. For that month we also had expenses, including the cost of gas for the delivery truck in the amount of $2,000, and the salary of the driver at $3,000. In the first full month of operation you do $10,000 worth of business (this becomes our revenue line). Let’s assume you start a delivery company and line up a few customers. Sign up for our online financial statement training and get the income statement training you need. The idea behind COGS is to measure all costs (which are variable) directly associated with making the product or delivering the service. These costs can include labor, material, and shipping. It includes all the costs directly involved in producing a product or delivering a service. Cost of Goods Sold, (COGS), can also be referred to as cost of sales (COS), cost of revenue, or product cost, depending on if it is a product or service.
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