Cost of Goods Sold Definition: It is all of the costs used in creating products or providing a service that has been sold.
Cost of goods sold, often referred to as "COGS" or sometimes "cost of sales", is the costs associated with the production of goods sold in a company. We also have a marginal cost calculator if you'd like to calculate the total cost when the production is increased.
The cost of goods sold falls into three categories.
There are two types of businesses where the direct labor may differ, a business that produces products and a business that offers services. When a business produces a product the direct labor is the production crew that produces it. While for services offered it is usually a person who is charging a customer and working direct labor hours.
For a business that produces products, the direct labor consists of:
Assembly line workers
Builders constructing a building
For a services company:
Direct materials cost, is the cost of raw materials, specialized parts and standard materials that become the finished product product. The materials must be traceable to the product to ensure it is a direct material cost. Direct materials does not include materials that are used in the production process.
Some Examples are:
Flour, Salt for a Bakery
Flour, Sugar, Eggs for a dessert store
Fabric for assembling clothes
Overhead costs are costs involved in the production of a product excluding the costs of materials, third-party expenses and direct labor. It is important for a company to continue to pay overhead. It greatly helps for budgeting purposes and also helps determine what to charge for a product to make a profit.
Cost Of Goods Sold formula:Beginning Inventory + Purchases made during the reporting period - Ending Inventory.
How To Calculate Cost Of Goods Sold
We need 3 pieces of information to calculate COGS.
Purchases made during the reporting period
We own a clothing store and we have a beginning inventory of $100,000 last month
Purchases during the month were $50,000
Last month was a pretty good month and at the end of the month our remaining inventory is $10,000
When we apply this to our formula we get:$100,000 + $50,000 - $10,000
Our cost of goods sold is $140,000
We are running a bakery, our inventory at the start of the week was $8,500
There was a mistake in storage and a lot of our inventory went bad, so our purchases for the week was $12,000
By the end of the week our remaining inventory is $1,200
We use our formula: $8,500 + $12,000 - $1,200 = $19,300
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