Cost of Goods Sold

Cost of goods sold represents the product costs of units sold during a particular period. It is the amount that is reported on the income statement as a subtraction from net sales revenue for the period to arrive at the gross profit for the period. It is an important determinant of a company’s ultimate gross profit margin.

Cost of goods sold does not include any period cost i.e. cost which is not incurred during the manufacturing process. It includes all manufacturing costs such as direct materials, direct labor and manufacturing overheads (both fixed and variable).

Formula

Cost of goods sold can be calculated as follows:

Direct materials cost incurred during the period
+Direct labor cost incurred during the period
+Manufacturing overheads cost incurred during the period
=Total manufacturing costs for the period
+Cost of work in progress (WIP) inventory at the start of the period
Cost of work in progress (WIP inventory at the end of the period
=Cost of goods manufactured during the period
+Cost of finished goods inventory at the start of the period
=Cost of goods available for sale
Cost of finished goods inventory at the end of the period
=Cost of goods sold

Cost of work in process (WIP) and cost of finished goods at the start of the period and the end of the period are reported as inventories on the balance sheet.

Example

Fixla, Inc. produces specialized digital cameras with military-grade durability. During the financial year ended, it sold 10,000 units for $15,000 each. Calculate the company’s cost of goods sold for the period and its gross profit margin from the data given below for the financial year ended 30 June 2015.

Total manufacturing costs for the period82,400,000
Cost of work in progress at the start of the period2,250,000
Cost of work in progress at the end of the period2,400,000
Cost of finished goods inventory at the start of the period32,800,000
Cost of finished goods inventory at the end of the period34,400,000

Solution

Cost of goods sold for Fixla, Inc. is calculated as follows:

Total manufacturing costs for the period82,400,000
Cost of work in progress at the start of the period+2,250,000
Cost of work in progress at the end of the period–2,400,000
Cost of goods manufactured during the period82,250,000
Cost of finished goods inventory at the start of the period+32,800,000
Cost of goods available for sale115,050,000
Cost of finished goods inventory at the end of the period–34,400,000
Cost of goods sold80,650,000

Gross profit = $15,000 × 10,000 – $80,650,000 = $150,000,000 – $80,650,000 = $69,350,000

Gross profit margin = $69,350,000 ÷ $150,000,000 = 46%

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