Cost of goods sold is one of the most significant expenses of both merchandising and manufacturing companies. Cost of goods sold is deducted from company sales to calculate gross profit. COGS calculations differ according to company activities, where calculations for merchandising company differ from calculations for manufacturing company.
Calculating the COGS for products you manufacture or sell can be complicated, depending on the number of products and the complexity of the manufacturing process. The process of calculating the COGS starts with inventory at the beginning of the year and ends with inventory at the end of the year
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Cost of goods sold meaning
Cost of goods sold (COGS) meaning differs according to natural of the business. In manufacturing companies, COGS refers to the direct costs of producing the goods sold by a company. This amount includes the cost of manufacturing company products such as materials and labor directly used to create the product. In addition to that, all indirect manufacturing costs are included in this amount such as indirect labor, indirect material, rent, depreciation, and maintenance. Companies usually include all manufacturing costs in computations of COGS, but exclude all selling and administration costs.
In merchandising (retail) companies, the components of COGS for manufacturing companies differs from the components of cost of goods sold for merchandising (retail) companies. In merchandising (retail) companies, COGS includes all of the costs and expenses directly related to the selling of goods. In these companies Cost of Goods Sold are also known as “cost of sales.
To conclude, COGS, also referred to as the cost of sales or cost of services. COGS is how much it costs to produce or sell your products or services. COGS include direct material and direct labor expenses that go into the production or selling of each good or service.
Cost of goods sold formula
The approaches used in calculating cost of goods sold in manufacturing companies differs from The approaches used in calculating COGS in merchandising (retail) companies.
In merchandising (retail) companies, to find the COGS during an accounting period, we use the COGS formula:
COGS = Beginning Inventory + cost of Purchases during the Period – Ending Inventory.
In the previous formula, beginning inventory is whatever inventory is left over from the previous period, and ending inventory is whatever inventory is still at the end of the current period.
For example, Assume that RightData company has beginning inventory of $100,000, makes purchases valued at $150,000, and is left with an ending inventory of $20,000. So RightData company COGS would be 230,000.
The calculation of COGS for manufacturing companies differs from the calculation of it for merchandising (retail) companies.
The formula used to calculate cost of goods sold for a manufacturing company is as following:
COGS = Beginning Inventory of Finished Goods + Cost of Goods Manufactured – Ending Inventory of Finished Goods.
For example, Assume that linkidist company has beginning inventory of finished goods $150,000, and produce products during the current period by about $350,000, and at the end of the accounting period , inventory of 70,000 was still in the company stores .
According to that linkidist company has a cost of goods sold of 430,000.
After computing COGS, it is deducted from revenues (sales) in order to calculate gross profit and gross margin. Higher COGS results in lower margins. And the value of COGS will change depending on the accounting standards used in the calculation.
Cost of goods sold consists of all the costs associated with producing the goods or providing the services offered by the company. For goods, these costs may include the variable costs involved in manufacturing products, such as raw materials and labor. The COGS is an important metric on the financial statements as it is subtracted from a company’s revenues to determine its gross profit. The gross profit is a profitability measure that evaluates how efficient a company is in managing its labor and supplies in the production process