Cost of Goods Sold

1109 WordsJul 24, 20055 Pages
A figure of cost of goods sold reflecting the cost of the product or good that a company sells to generate revenue, appearing on the income statement, as an expense. Also, referred to as "cost of sales". It is essentially a cost of doing business, such as the amount paid to purchase raw materials in order to manufacture them into finished goods. For example, if a $10 widget costs $6 to make, then the cost of goods sold is $6 per widget. That is, the cost of goods sold is equal to the beginning inventory plus the cost of goods purchased during some period minus the ending inventory. However, the meaning of the cost of goods sold differs from one company to another company. There are three types of companies such as merchandising,…show more content…
(Cost of goods sold) = (Beginning finished goods inventory) + (Cost of goods manufactured) – (Ending finished goods inventory) Service organizations such as barber and beauty shops don 't produce tangible goods. Therefore, they don 't have finished goods inventory. Instead, they have the labor costs, supplies costs, and office overhead costs. For instance, in barber shops, hair stylist would be labor costs. The shampoo basin and chair would be supplies costs. The rent and utilities would be office overhead costs. There is a problem with cost of goods available for sale. If the amount of cost of goods sold is high, the amount of ending inventory will be low. If the amount of ending inventory is high, the amount of cost of goods sold will be low. Therefore, we should determine how to divide the cost of goods available for sale into the cost of goods sold and ending inventory. There are four types of methods: specific identification, average cost, FIFO, and LIFO. In the specific identification method, unit cost is defined and then the cost of goods sold is calculated like the following. (Cost of goods sold) = (Units of goods sold during the period) * (Unit cost) Then, the ending inventory is the following. (Ending inventory) = (Cost of goods available for sale) – (Cost of goods sold) In the

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