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Cost of Goods Sold Statement:

Definition and Explanation:

Cost of goods sold represents the sum of the costs of all goods which have been sold during the accounting period. It is ascertained by adding the value of unsold goods at the beginning of the year (opening inventory or stock) to the purchases made during the year and the deducting the values of unsold goods at the end of the year (closing inventory of stock) from the purchases. Theses are expired costs, and thus are actual expenses for the year.

It must be noted that purchase price of goods includes not only the cost price of goods but also all expenses connected with the purchases, such as freight inwards carriage, wages, customs duty etc. These expenses are collectively known as direct expenses. In determining of cost of goods sold net purchases are taken into account. When all direct expenses are added to the purchase price of goods and purchases returns are deducted from purchases, the result is net purchases.

Cost of Goods Sold Format:

The schedule of cost of goods sold will be as follows:
 

Merchandise inventory opening   xx
Add Purchases xx  
Less Returns and allowances xx  
 
 
  xx  
Add Direct expenses xx xx
 

Cost of goods available for sale   xx
Less merchandise inventory closing   xx
   
Cost of goods sold   xx

Formula/Equation of Cost of Goods Sold (COGS):

The above procedure may also be written in equation form. This equation is sometimes referred to as cost of goods sold formula:

COGS = Opening inventory + Purchases + Direct expenses - Closing inventory

Purchases in the above formula are net purchases i.e., purchases less purchases returns and discounts etc.

Example:

Merchandise inventory on 1st Jan. 2005 9100
Purchases during the year, 2005 170,000
Purchases returns 2,000
Purchases discount and allowances 1,000
Transportation inwards 5,000
Customs duty etc. 7,000
Merchandise inventory on 31 December, 2005 10,300

Required: Prepare a cost of goods sold statement.

Cost of Goods Sold Statement
For the year ended...................

Merchandise inventory opening   9100
Add Purchases 170,000  
Less Returns and allowances 2000  
 
 
  168000  
Less Purchases discount 1000  
 
 
  167000  
Add Direct expenses 12,000 179,000
 

Cost of goods available for sale   188100
Less merchandise inventory closing   10300
   
Cost of goods sold   177800
   

The format of cost of goods sold statement discussed above is used by merchandising companies. Notice that there is no calculation for the cost of goods manufactured within the cost of goods sold statement. This is because merchandising companies or firms do not involve in the production of goods. The procedure and method that is used by manufacturing companies to prepare a cost of goods sold is discussed below:

Cost of Goods Sold Statement of Manufacturing Companies:

Cost of goods sold of a manufacturing company is normally divided into five sections:

  1. Direct Materials Section: This section comprises of beginning inventory, purchases, and any purchases returns or allowances, and ending inventory.

  2. Direct Labor Section: This section indicates the cost of those employees whose work can identified directly with the product manufactured.

  3. Factory Overhead Section: Factory overhead section comprises of all those costs that assist in an indirect manner in the manufacturing of the product, e.g., factory supplies and depreciation of machinery. The factory overhead section does not indicate the amount of fixed and variable factory overhead. It must be assumed that the items are stated at actually experienced costs.

  4. Work in process inventories section: This section represents costs in process at the beginning and costs still in process at the end of the fiscal period.

  5. Finished Goods Inventories: This section represents the finished goods inventory at the beginning and at the end of the period.

Example:

Cost of Goods Sold Statement
For the year ended December 31, 2005

Direct Materials: ( Section 1)      
Materials inventory, January 1, 2005   1572400  
Purchases 8420000    
Less purchases returns and allowances 42,000 8378000  
 

 
Materials available for use   9950400  
 Less materials inventory, December 31, 2005   1270600  
   
 
Direct materials consumed     8679800
Direct labor ( Section 2)     7346400
Factory overhead: ( Section 3)
     Indirect labor 1329300
     Salaries   972000  
     Payroll taxes   489000  
     Power   112000  
     Heat   69200  
     Light   44300  
     Factory supplies   50000  
     Depreciation - factory building   68300  
     Depreciation - machinery   403000  
     Repairs and maintenance   145800  
     Patent amortization   33200  
     Tools and dies used   178600  
     Insurance on building and machinery   21200  
   
 
      3915900
     
Total manufacturing cost     19942100
Add work in process inventory, January 1 2005. ( Section 4)     2338000
     
Total cost to be accounted for     22280100
Less work in process inventory, December 31 2005.     1303200
     
Cost of goods manufactured     20976900
Add finished goods inventory, January 1, 2005 ( Section 5)     966100
     
Cost of goods available for sale     21943000
Less finished goods inventory, December 31, 2005.     658000
     
Cost of goods sold     21285000
     

Relevant Articles:

Income statement
Cost of Goods Sold Statement
Cost of Goods Manufactured Statement
Balance Sheet - Report Form
Difference between Income Statement and Trading and Profit and Loss Account
Adjustments and their Effect on Financial Statements
Evaluation of Financial Statements

 

 

 

 

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  Introduction to Accounting
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  Transactions and Accounting Equation
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  Special Journals
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  Cash Book
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Bank Reconciliation Statement
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  Valuation of Inventories
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  Accounts of Non-profit Making Organizations
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  Capital Investment Analysis/Capital Budgeting
 
 

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