Cost of goods sold

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Cost of goods sold ( COGS ) refers to the carrying amount of goods sold during a certain period.

Costs are associated with a particular item using one of several formulas, including special identification, first incoming out (FIFO), or average cost. Cost includes all purchase costs, conversion fees and other costs incurred to bring supplies to their current location and condition. The cost of goods made by the business includes material, labor, and overhead costs allocated. The cost of unsold items is deferred as inventory cost until inventory is sold or written down in value.

Video Cost of goods sold

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Many businesses sell goods they buy or make. When goods are purchased or produced, the costs associated with the item are capitalized as part of the inventory (or stock) of the goods. These costs are treated as expenses in the business period acknowledging the revenue from the sale of goods.

Setting costs requires storage of records of goods or materials purchased and rebates for the purchase. In addition, if the goods are modified, the business must determine the costs incurred in modifying the goods. Such modification costs include labor, supplies or supplementary materials, supervision, quality control and equipment usage. Principles for determining costs can be easily stated, but applications in practice are often difficult due to various considerations in cost allocation.

Cost of goods sold may also reflect adjustments. Among the potential adjustments are the decrease in the value of the goods (ie, market value lower than cost), obsolescence, damage, etc.

When many items are bought or made, it may be necessary to identify which costs are associated with certain items being sold. This can be done using identification conventions, such as goods first-in-first-out (FIFO), or average cost. Alternative systems may be used in some countries, such as the last entry method (LIFO), gross profit method, retail method, or a combination of these.

Cost of goods sold may be the same or different for accounting and tax purposes, subject to certain jurisdictional rules. Certain costs are included in the HPP. The fees included in the HPP can not be deducted as a business expense. COGS fees include:

The cost of the product or raw material, including the cost of shipping or shipping;
The cost of saving products sold by the business;
Direct labor costs for workers who produce products; and
Factory overhead.
Depreciation

Maps Cost of goods sold

Importance of inventory

Inventories have a significant effect on earnings. Businesses that make or buy goods for sale must keep track of inventory under all accounting rules and income taxes. An example illustrates the reason. Fred buys auto parts and resells them. In 2008, Fred bought a $ 100 share. He sold the $ 80 spare parts he bought for $ 30, and had the remaining $ 70. In 2009, he sold the rest of his spare parts for $ 180. If he tracks inventory, his profit on the year 2008 is $ 50, and the profit in 2009 is $ 110, or a total of $ 160. If he deducted all costs in 2008, he would lose $ 20 in 2008 and a profit of $ 180 in 2009. The amount is the same, but the time is much different. The accounting rules and income tax of most countries (if the state has income tax) require the use of inventory for all businesses that regularly sell goods they have made or bought.

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Cost of goods for resale

The price of goods purchased for resale includes the purchase price and all other acquisition costs, excluding any discounts.

Additional charges may include fees paid for obtaining goods, customs clearance, sales or using non-refundable taxes paid on materials used, and fees paid for acquisitions. For financial reporting purposes, period costs such as purchasing department, warehouse, and other operating expenses are usually not treated as part of inventory or cost of goods sold. For U.S. income tax purposes, some of the costs of this period should be capitalized as part of the inventory. The cost of selling, packing, and delivering goods to customers are treated as operating costs associated with the sale. International and US accounting standards require that certain abnormal costs, such as those associated with idle capacity, should be treated as a cost not part of the inventory.

Discounts that must be deducted from the cost of purchased inventory are as follows:

Trade discounts (reduction of the prices of goods supplied by manufacturers or wholesalers to retailers) - including always-permitted discounts, regardless of time of payment.
Manufacturers rebates - are based on dealer purchases throughout the year.
Cash discounts (reduced invoice prices provided by the seller if the dealer pays directly or within the prescribed time) - may reduce COGS, or can be treated separately as gross income.

Value added tax is generally not treated as part of cost of goods sold if it can be used as input credit or otherwise can be recovered from the tax authorities.

Income Statements for Manufacturing Companies

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Cost of goods created by business

The cost of goods produced in the business should cover all production costs. The main components of cost generally include:

Spare parts, raw materials and supplies used,
Labor, including related costs such as taxes and payroll benefits, and
The overhead of the business that can be allocated for production.

Most businesses make more than one particular item. Thus, costs incurred for some items rather than certain items sold. Determining how much of each of these components to allocate certain items requires either tracking certain costs or making some cost allocations. Parts and raw materials are often tracked to specific devices (eg, , batch or production runs) of goods, then allocated to each item.

Labor costs include direct labor and indirect labor. Direct labor costs are wages paid to employees who spend all their time working directly on manufactured products. Indirect labor costs are wages paid to employees of other factories involved in production. Salary and allowances tax costs are usually included in labor costs, but can be treated as overhead. Labor costs can be allocated to one or more items based on the timekeeper notes.

Material costs include direct materials, as well as indirect supplies and materials. If an unintended amount of inventory is maintained, the taxpayer must keep inventory stock for the purpose of income tax, charging it to cost or cost of goods sold rather than purchased.

Materials and labor can be allocated based on past experience, or standard costs. Where the material or labor cost for a period exceeds the expected standard cost amount, a variance . The variation is then allocated between the cost of goods sold and the remaining inventory at the end of the period.

Determining overhead often involves making assumptions about what costs should be associated with production activities and what costs should be associated with other activities. Traditional cost accounting methods seek to make these assumptions based on past experience and management judgments about factual relationships. Activities are based on the cost of attempting to allocate costs based on factors that drive businesses to spend.

Overhead costs are often allocated to the set of goods produced based on the ratio of working hours or the cost or the ratio of materials used to produce the set of goods. Overhead costs can be referred to as factory overheads or factory loads for factory-level costs or overall load for costs incurred at the organizational level. Where working hours are used, a load rate or overhead per work hour can be added along with labor costs. Other methods can be used to link overhead costs with certain manufactured goods. Overhead rates may be standard rates, in which case there may be variance, or can be adjusted for each set of manufactured goods.

2.6 Calculating Cost of Goods Sold - YouTube

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Identification convention

In some cases, cost of goods sold can be identified with the goods sold. Usually, however, the identity of the goods is lost between the time of purchase or manufacture and the time of sale. Determine which items have been sold, and the cost of those items, require the identification of goods or use the convention to assume which goods are sold. This may be referred to as an assumption of cost flow or assumption or inventory identification convention. The following methods are available in many jurisdictions to associate costs with goods sold and goods still in hand:

Custom identification. Under this method, certain items are identified, and costs are tracked with respect to each item. This may require considerable recording. This method can not be used if the goods or goods are indistinguishable or interchangeable.
Average cost. The average cost method relies on the average unit cost to calculate the unit cost sold and the ending inventory. Some calculation variations may be used, including weighted average and moving average.
First-In First-Out (FIFO) assumes that the first purchased or manufactured item is sold first. The cost of inventory per unit or item determined at the time of manufacture or acquisition. The oldest cost ( i.e. , the first entry) is then matched against revenue and set to cost of goods sold.
Last-In First-Out (LIFO) is the opposite of FIFO. Some systems allow the determination of the cost of goods at the time of acquisition or creation, but charge fees for goods sold on the assumption that the goods that were made or purchased last were sold first. The cost of certain items acquired or made is added to the set of fees for the type of goods. Under this system, businesses can maintain fees under FIFO but track offsets in the form of LIFO reserves. Such reserves (assets or contra-assets) represent the differences in inventory costs based on FIFO and LIFO assumptions. The amount may differ for financial reporting and tax purposes in the United States.
LIFO Dollar Value. Under this LIFO variation, the increase or decrease in LIFO reserves is determined by dollar value rather than quantity.
Retail inventory method. An item retailer can use this method to simplify the recording. The cost of goods calculated on hand at the end of the period is the ratio of the cost of the goods obtained to the retail value of goods times the retail value of the goods in hand. The cost of the goods obtained includes the initial inventory as previously assessed plus the purchase. Cost of goods sold then start inventory plus purchase minus the calculated cost of goods at hand at the end of the period.

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Example

Jane owns a business that resells machines. At the beginning of 2009, he did not have a machine or spare parts. He buys A and B machines for 10 each, and then buys C and D engines for 12 each. All machines are the same, but have serial numbers. Jane sells A and C machines for 20 each. The cost of goods sold depends on the inventory method. With a special identification, cost of goods sold is 10 12, the special cost for machines A and C. If he uses FIFO, the cost is 20 (10 10). If he uses the average cost, the cost is 22 ((10 10 12 12)/4 x 2). If he uses LIFO, the cost is 24 (12 12). Thus, the profits for accounting and tax purposes may be 20, 18, or 16, depending on the inventory method. After the sale, the inventory value is 20, 22, or 24.

After the end of the year, Jane decides she can make more money by improving machine B and D. She buys and uses 10 parts and supplies, and takes 6 hours at 2 per hour to make improvements for each machine. Jane has overhead, including rent and electricity. He calculated that the additional charge added 0.5 per hour to the cost. So Jane has spent 20 to fix every machine (10/2 12 (6 x 0.5)). He sells machine D for 45. The price for the machine depends on his inventory method. If he uses FIFO, the cost of machine D is 12 plus 20 which is spent to fix it, for profit 13. Remember, he uses two cost items 10 that already exist under FIFO. If he uses the average cost, it is 11 plus 20, for profit 14. If he uses LIFO, the cost is 10 plus 20 for profit 15.

In year 3, Jane sold the last machine for 38 and quit the business. He recovered his last charge. The total profit for three years is the same under all inventory methods. Only different earnings and inventory balances. Here is a comparison based on FIFO, Average Cost, and LIFO:

Cost of Goods Sold (Cogs) | Accounting | Chegg Tutors - YouTube

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Posts and benefits

The value of goods owned for sale by a business may decrease due to a number of factors. Item may prove to be defective or below normal (subnormal) quality standards. Goods can become obsolete. The market value of goods may only decrease due to economic factors.

When the market value of the goods decreases for any reason, the business may choose to rate its inventory below cost or market value, also known as net realizable value . This can be recorded by charging ( ie , creating inventory reserves) for a decrease due to obsolescence, etc. The net income of the current period and the net inventory value at the end of the period are reduced for impairment.

Any property held by a business can be degraded or damaged by an unusual event, such as a fire. The loss of the value at which goods are destroyed is recorded as a loss, and the inventory is completely removed. Generally, such losses are recognized for both financial reporting and tax purposes. However, the number of books and taxes may differ under some systems.

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Alternate view

Traditional cost accounting alternatives have been proposed by various management theorists. These include:

Throughput Accounting, under Theory of Constraints, where only one variable cost is included in cost of goods sold and inventory is treated as an investment.
Lean accounting, where most traditional costing methods are overlooked for measuring weekly "value streams".
Calculation of resource consumption, which discards most of the current accounting concepts that support proportional costing based on simulations.

None of these views are in conformity with the generally accepted Accounting Principles or US Accounting Standards, nor are they accepted for most income or other tax reporting purposes.

Direct Labor & Cost of Goods Sold Budget - YouTube

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Other terms

Net sales = gross sales - (discounts, returns and customer benefits)

Gross profit = net sales - cost of goods sold

Operating profit = gross profit - total operating cost

Net profit = operating profit - tax - interest

Net income = net sales - cost of goods sold - operating expenses - tax - interest

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References

Excel 2013 Tutorial - How to Calculate the Cost of Goods Sold ...

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Cost of goods sold

Kamis, 28 Juni 2018