Cost of goods sold is the total costs directly involved in manufacturing a product. COGS is a financial metric. It measures the total expenses a company bears while acquiring a product. This calculation helps you calculate gross profit. You have to subtract COGS from revenue directly. This article covers what cost of goods sold is and how to calculate it.
Cost of goods sold is the direct cost associated with producing or obtaining a product. You can measure the direct production cost per unit of product.
Subtracting COGS from revenue helps you assess gross profit. It helps you measure the operational efficiency of your business.
Components Cost of Goods Sold?
COGS is a sum of multiple costs. This includes raw materials, direct labour, and manufacturing overhead. Shipping and handling costs will also be included in COGS.
Raw material costs are all the ingredient expenses to produce the finished product.
Direct labour costs are the wages and salaries paid to the workers to produce the finished product.
Manufacturing overhead costs are the indirect costs associated with producing a product. It can be rent, utilities, depreciation, etc.
For example, a company sells baby toys. It incurs $10,000 in raw material costs. Its labour costs are $4,000. Plus, the total overhead costs are $2,000. There are around $1,000 shipping and handling costs, too.
Hence, the total cost of goods sold is $17,000 ($10,000+$4,000+$2,000+$1,000). The company incurs $17,000 in direct product costs to produce a specific number of baby toys.
COGS equals beginning inventory plus purchases during the period minus ending inventory.
Summing up beginning inventory and purchases during the period helps you identify total goods available for sale. Then, subtract the figure from the ending inventory to find the cost of goods sold.
For example, starting inventory is $50,000. The cost of purchases made during the period is $150,000. Plus, ending inventory is $30,000.
The total goods available for sale are $200,000. ($50,000+$150,000). Finally, COGS $170,000 ($200,000-$30,000).
COGS provides businesses with the following benefits.
When subtract the cost of goods sold from total revenue estimates gross profit. It helps you find out the efficiency of production.
COGS helps companies set the optimal pricing. This will increase their product sales and decrease the overall costs.
COGS allows you to figure out which costs could be avoided. Plus, you can determine the specific product phases that are causing too much cost.
A proper calculation of COGS enables you to pay the exact amount of the tax bill. You pay neither too high nor too low.
A business must track every single cost from beginning to end to calculate the exact cost of goods sold. Are you running a service-related business? Consider the costs you bear while giving services, such as labour costs, supplement expenses, software costs, etc. This helps you identify how much you incur for providing every single service.
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