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:
-
Direct
Materials Section: This section
comprises of beginning inventory, purchases,
and any purchases returns or allowances, and
ending inventory.
-
Direct
Labor Section: This section
indicates the cost of those employees whose
work can identified directly with the
product manufactured.
-
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.
-
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.
-
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 |
| |
|
|
|
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