Cost Of Goods Sold (COGS)
Cost of goods sold is the managerial calculation which abbreviation is (COGS). It uses to measure the incurred cost producing product which was sold during the period. Simply we can say that COGS is the amount which company spends on labour, material, manufacturer and on the purchased product which is to be sold to the customer during the year.
What is Cost of Goods Sold?
For the merchandise, it uses the direct cost which was sold and it does not include the indirect cost. This measurement is used to find the true cost of merchandise which is purchasing by the customer during the year.
For the management Cost of goods sold (COGS) formula s very helpful because it finds how well the purchasing and payroll cost controlled. For the measurement of gross margin analyst and management use the cost of goods calculation and analyze percentage revenue to cover operation expenses are enough or not.
Cost of goods sold can be calculated by the formula in which we add the beginning inventory with purchases and subtract ending inventory from it that is:
Cost of Goods Sold= beginning inventory + purchase – ending inventory
We measure the merchandise cost for which ist we take the beginning inventory then we add in this purchasing inventory which is the new inventory and add these two to find the total cost inventory. Now to find the cost of sold inventory we need to subtract the ending inventory from total inventory. It may be confusing for you so for simplification we use the example of the cost of goods sold (COGS).
Here we take the example of a company which inventory explanation listed below
- Beginning inventory= $100,000
- new purchasing=$450,000
- Ending inventory=$35,000
Now you can learn how to find the cost of goods sold from the above values that is
From the above result, we know the merchandising cost of the company is $515,0000 and the worth of the product which leave is $35,000 on December 31.
Accounting Analysis of COGS
How the cost of good sold affected by inventory Costing Method?
In the COGS definition inventory sold only is included in the current period but it ignores that what inventory order deems to be sold. If the retailer chooses the FIFO or LIFO inventory method then both methods have different calculation implication.
Calculating COGS using FIFO
In FIFO the first unit is purchase must be sold first. A company purchase inventory in January and second inventory in June the company must sell the inventory first which purchase in June and then the inventory of June. By lowering the COGS FIFO increase the net income over time in the time of inflation.
Calculating COGS using LIFO
LIFO is opposite to FIFO in which the last unit purchase is the first unit sold. So in this June inventory sold before the January inventory by the company.
If the price of unit rose from January to June then in this case company pay more for the June inventory due to which relative to FIFO, LIFO increase his cost and decrease income.
Companies use a different type of inventory system for calculation of purchase and sales which also makes a difference. Some companies use periodic inventory system whereas some use perpetual inventory system.
Calculating COGS using Periodic Inventory System
The periodic inventory system is used to counts the inventory in interval through the year. The company which mentions in above example if use periodic inventory system then it may be count inventory after every quarter of the year. This is not used as an ideal inventory system because lag time extended in the real data. So if the company use this calculation after every three mon then the company can’t see the problems with inventory.
Calculating COGS using a perpetual inventory system
To counts the merchandise in real time perpetual inventory system is used. By keeping the real-time count of the inventory if something is to purchase then immediately recorded in the system and if sold then immediately remove from the system. Above mention company merchandise record more accurately because of which at any point during the period income statement can be produced. The only downside to the perpetual system is cost. Typically computer system must be to use it for implementation through bar code.
There are many factors which affect the cost of goods sold definition due to which it is called the subject of fraudulent accounting. For the calculation of inventory sold and purchase performance management and external investor use COGS calculation.
For more Financial Ratio Check:
Compound annual growth rate (CAGR)