What is the Cost Of Goods Sold (COGS)?
The cost of goods sold is the total cost of producing goods or services sold during a particular period, including raw material and labor expenditures as well as some other indirect expenses such as the sale force or distribution costs.
How to calculate the Cost Of Goods Sold?
Cost of Good Sold = Beginning Inventory (at the beginning of the period) + Purchases during the period – Ending Inventory (at the end of the period)
* Value of the Beginning Inventory also includes leftovers from the previous period.
* An accounting period can be months, quarters, or years.
What is the Cost Of Goods Sold used for?
Determining prices on certain items or services
By carefully calculating the COGS value, businesses will be able to properly determine prices on goods and services in order to turn a maximum profit.
Calculating business gross and net income
COGS always needs taking into account when calculating business Gross Profit as well as Net Profit.
The formulas are:
* Gross Profit = Gross Revenue – COGS
* Net Profit = Revenue – COGS – Expenses
When looking at Gross Profit and Net Profit, businesses will be able to gain a deeper understanding of how efficient the company is at managing budget, labor, and supplies during production progress. Consequently, these figures play an essential role in the progression of seeking and deciding business general financial strategies.
Does COGS change?
Businesses are recommended to adjust the inventory cost (which may change their COGS). suits the amount of expenditure in certain accounting periods.
There are 3 inventory costing method:
First In, First Out (FIFO)
Because the market price will tend to increase over time, the retail business using this method will put the lowest-price items for sale first in order to decrease CSGO and increase their net profit, at the same time.
Last In, First Out (LIFO)
Unlike FIFO, in this method, the latest items added to the inventory will be put up for sale first. This method makes CSGO value higher and as a result, the net profit simultaneously gets lower.
With this method, businesses will use the average price of every good in stock, regardless of the selling date, to price the items sold. The average method prevents CSGO from being greatly influenced by the costs of purchases.