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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

A D V E R T I S E M E N T

 Financial Accounting Topics Introduction to Accounting ---------------------------------------------------------------------------- Transactions and Accounting Equation ---------------------------------------------------------------------------- Analysis of Business Transactions ---------------------------------------------------------------------------- Journal, Ledger and Trial Balance ---------------------------------------------------------------------------- Accounting for Bills of Exchange ---------------------------------------------------------------------------- Special Journals ---------------------------------------------------------------------------- Cash Book ---------------------------------------------------------------------------- Bank Reconciliation Statement ---------------------------------------------------------------------------- Final Accounts ---------------------------------------------------------------------------- Work Sheet ---------------------------------------------------------------------------- Capital and Revenue Items ---------------------------------------------------------------------------- Valuation of Inventories ---------------------------------------------------------------------------- Accounts of Non-profit Making Organizations ---------------------------------------------------------------------------- Statement of Cash Flows ---------------------------------------------------------------------------- Accounting Ratios Analysis ---------------------------------------------------------------------------- Depreciation, Provisions and Reserves ---------------------------------------------------------------------------- Accounting Dictionary ---------------------------------------------------------------------------- Financial Calculators

 Managerial Accounting Topics Financial Statements ---------------------------------------------------------------------------- Cost Volume Profit Relationship ---------------------------------------------------------------------------- Variable Costing System ---------------------------------------------------------------------------- Materials and Inventory Cost Control ---------------------------------------------------------------------------- Activity Based Costing System ---------------------------------------------------------------------------- Standard Costing and Variance Analysis ---------------------------------------------------------------------------- Balanced Scorecard ---------------------------------------------------------------------------- Capital Investment Analysis/Capital Budgeting