Cost of Goods Sold

Examples of Cost of Goods Sold in the following topics:

• Cost of Goods Sold and Gross Profit

  • Cost of goods sold refers to the inventory costs of the goods a business has sold during a particular period.
  • Costs of goods made by the business include material, labor, and allocated overhead.
  • The costs of those goods not yet sold are deferred as costs of inventory until the inventory is sold or written down in value.
  • When the goods are bought or produced, the costs associated with such goods are capitalized as part of inventory (or stock) of goods.
  • Explain the difference between cost of goods sold and gross profit

• Cost of Goods Sold

  • In the language of accounting, that is the meaning of "cost of goods sold."
  • Cost of goods sold (COGS) refers to the inventory costs of those goods a business has sold during a particular period.
  • In the language of accounting, that is the meaning of "cost of goods sold."
  • Cost of goods sold may also reflect adjustments.
  • Cost of goods sold (COGS) refer to the inventory costs of those goods a business has sold during a particular period.

• Cost Flow Assumptions

  • Inventory cost flow assumptions (e.g., FIFO) are necessary to determine the cost of goods sold and ending inventory.
  • FIFO assigns first costs incurred to COGS (cost of goods sold) on the income statement.
  • Inventory cost flow assumptions are necessary to determine the cost of goods sold and ending inventory.
  • The only requirement, regardless of method is that: The total cost of goods sold plus the cost of the goods remaining in the ending inventory for financial and tax purposes is equal to the actual cost of goods available.
  • Assigns first costs incurred to COGS (cost of goods sold) on the income statement

• Selecting an Inventory Method

  • Companies that use the specific identification method of 'inventory costing' state their cost of goods sold and ending inventory as the actual cost of specific units sold and on hand.
  • The cost of goods sold on the income statement is USD 56 (10 units * USD 5 + 1 unit * USD 6).
  • During periods of inflation, LIFO shows the largest cost of goods sold of any of the costing methods because the newest costs charged to cost of goods sold are also the highest costs.
  • The larger the cost of goods sold, the smaller the net income.
  • The cost of goods sold on the income statement is USD 1,250 (50 units * USD 25).

• FIFO Method

  • FIFO stands for "first-in, first-out," and assumes that the costs of the first goods purchased are charged to cost of goods sold.
  • Ending inventory = beginning inventory + net purchases - cost of goods sold
  • Keep in mind the FIFO assumption: Costs of the first goods purchased are those charged to cost of goods sold when the company actually sells goods.
  • Periods of Rising Prices (Inflation)FIFO (+) Higher value of inventory (-) Lower cost of goods sold
  • Periods of Falling Prices (Deflation)FIFO (-) Lower value of inventory (+) Higher cost of goods sold

• Impact of Inventory Method on Financial Statement Analysis

  • The oldest cost (i.e., the first in) is then matched against revenue and assigned to cost of goods sold.
  • Last-In First-Out (LIFO) is the reverse of FIFO; the latest cost (i.e., the last in) is assigned to cost of goods sold and matched against revenue.
  • Some systems permit determining the costs of goods at the time acquired or made but assigning costs to goods sold under the assumption that the goods made or acquired last are sold first.
  • Cost of goods sold is then beginning inventory plus purchases less the calculated cost of goods on hand at the end of the period.
  • The Average Cost method relies on average unit cost to calculate cost of goods sold and ending inventory.

• Inputs to COGS

  • Cost of goods sold (COGS) refer to the inventory costs of the goods a business has sold during a particular period.
  • Costs of goods made by the business include material, labor, and allocated overhead.
  • The costs of those goods not yet sold are deferred as costs of inventory until the inventory is sold or written down in value.
  • Because costs of goods sold is a major expense for most companies, it is an extremely important input to a forecast of the income statement.
  • Also, because cost of goods sold is such a broad input, encompassing many separate expenses with different methods of estimating each, it becomes difficult to accurately forecast all phases.

• Specific Identification Method

  • It subtracts the USD 181 ending inventory cost from the USD 690 cost of goods available for sale to obtain the USD 509 cost of goods sold.
  • Note that you can also determine the cost of goods sold for the year by recording the cost of each unit sold.
  • However, this method allows management to easily manipulate ending inventory cost, since they can choose to report that the cheaper goods were sold first, therefore increasing ending inventory cost and lowering cost of goods sold.
  • The company computes the ending inventory as shown in ; it subtracts the USD 181 ending inventory cost from the USD 690 cost of goods available for sale to obtain the USD 509 cost of goods sold.
  • Note that you can also determine the cost of goods sold for the year by recording the cost of each unit sold.

• Average Cost Method

  • The cost of goods sold on the income statement is USD 1,250 (50 units * USD 25).
  • The Current Goods Available for Sale is deducted by the amount of goods sold (COGS), and the Cost of Current Inventory is deducted by the amount of goods sold times the latest (before this sale) Current Cost per Unit on Goods.
  • This deducted amount is added to Cost of Goods Sold.
  • The cost of goods sold on the income statement is $50\text{ units} \cdot $21 = $1050$.
  • When a company uses the Weighted-Average Method and prices are rising, its cost of goods sold is less than that obtained under LIFO, but more than that obtained under FIFO.

• Inventory Techniques

  • It takes Cost of Goods Available for Sale and divides it by the total amount of goods from Beginning Inventory and Purchases.
  • After each purchase, Cost of Current Inventory is divided by Current Goods Available for Sale to get Current Cost per Unit on Goods.
  • The Current Goods Available for Sale is deducted by the amount of goods sold, and the Cost of Current Inventory is deducted by the amount of goods sold times the latest (before this sale) Current Cost per Unit on Goods.
  • This deducted amount is added to Cost of Goods Sold.
  • At the end of the year, the last Cost per Unit on Goods, along with a physical count, is used to determine ending inventory cost.