Cost of goods Sold definition

Sample Income Statement


Definition:
Cost of goods sold is the accumulated total of all costs used to create a product or service, which has been sold. These costs fall into the general sub-categories of direct labor, materials, and overhead. In a service business, the cost of goods sold is considered to be the labor, payroll taxes, and benefits of those people who generate billable hours (though the term may be changed to "cost of services"). In a retail or wholesale business, the cost of goods sold is likely to be merchandise that was bought from a manufacturer.

In the income statement presentation, the cost of goods sold is subtracted from revenues to arrive at the gross margin of a business.

In a periodic inventory system, the cost of goods sold is calculated as beginning inventory + purchases - ending inventory. The assumption is that the result, which represents costs no longer located in the warehouse, must be related to goods that were sold. Actually, this cost derivation also includes inventory that was scrapped, or declared obsolete and removed from stock, or inventory that was stolen. Thus, the calculation tends to assign too many expenses to goods that were sold, and which were actually costs that relate more to the current period.

In a perpetual inventory system, the cost of goods sold is continually compiled over time as goods are sold to customers. This approach involves the recordation of a large number of separate transactions, such as for sales, scrap, obsolescence, and so forth. If cycle counting is used to maintain high levels of record accuracy, this approach tends to yield a higher degree of accuracy than a cost of goods sold calculation under the periodic inventory system.

The cost of goods sold can also be impacted by the type of costing methodology used to derive the cost of ending inventory. Consider the impact of the following two inventory costing methods:

  • First in, first out method. Under this method, known as FIFO, the first unit added to inventory is assumed to be the first one used. Thus, in an inflationary environment where prices are increasing, this tends to result in lower-cost goods being charged to the cost of goods sold.
  • Last in, first out method. Under this method, known as LIFO, the last unit added to inventory is assumed to be the first one used. Thus, in an inflationary environment where prices are increasing, this tends to result in higher-cost goods being charged to the cost of goods sold.

For example, a company has $10, 000 of inventory on hand at the beginning of the month, expends $25, 000 on various inventory items during the month, and has $8, 000 of inventory on hand at the end of the month. What was its cost of goods sold during the month? The answer is:

Beginning inventory $10, 000
+ Purchases 25, 000
- Ending inventory 8, 000
= Cost of goods sold $27, 000

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Cost of Goods Sold
Cost of Goods Sold
Cost Of Goods Sold (COGS) Definition | Investopedia
Cost Of Goods Sold (COGS) Definition | Investopedia

Q&A

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With respect to the US GAAP, what would the definition of Cost of Goods Sold be? | Yahoo Answers

In accounting, the cost of goods sold (also, cost of sales) describes the direct expenses incurred in producing a particular good for sale, including the actual cost of materials that comprise the good, and direct labor expense in putting the good in salable condition. Cost of goods sold does not include indirect expenses such as office expenses, accounting, shipping department, advertising, and other expenses that can not be attributed to a particular item for sale.
Simpily put, cost of good sold is the COST of the merchandise that was SOLD to the customers. The difference between y…

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How to Account for Cost of Goods Sold.

Part 2 of 3: Calculating Ending Inventory


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