An accounting term that indicates the amount of money invested in a product that is sold, resulting in income for the company. The cost of goods sold can be calculated through several different methods, depending on the process by which the company acquired the goods.
Goods that a company purchases with the intent to resell must include several elements in their cost of goods sold calculation: the cost of the raw material, including shipping; labor costs for employees who process the products; storage and inventory costs; factory overhead.
Goods that are produced by a company should include: the costs of raw materials, parts and supplies; all labor costs, including payroll taxes; company overhead for production.
Calculating Cost of Goods Sold
The calculation of cost of goods sold can have a direct impact on the inventory calculation. Depending on the type of inventory costing method used, it can offer an accurate picture of a company’s valuation at any given time.
A basic method of calculating the cost of goods sold is to begin with the amount of inventory on hand. Adding any inventory purchases made during the specified time period and deducting the ending inventory amount will provide the company with the cost of goods sold during the allotted time period.
This simple method of calculating the costs does not take into account theft, damage of other factors which may affect the amount of inventory on hand. There are a variety of methods that can be used to determine the costs: First In First Out (FIFO), Last In First Out (LIFO), Average Cost per Unit and others are some of the ways that this calculation can be made.
Regardless of the method used, this calculation is essential in determining the amount of inventory on hand, as well as determining the value of the goods sold by the company.