Cost of Goods Sold (COGS) is an accounting term that represents the direct costs incurred by a company in producing or acquiring the goods it sells during a specific period. It includes the cost of materials, labor, and other direct costs directly associated with the production or acquisition of the goods.
COGS is an important financial metric because it is subtracted from the company's revenue to determine its gross profit. Gross profit is calculated as revenue minus COGS and represents the amount of money left after deducting the direct costs of producing the goods.
The calculation of COGS can vary depending on the type of business and the accounting methods used. However, in general, COGS can be calculated using the following formula:
COGS = Opening Inventory + Purchases or Production Costs - Closing Inventory.
Here's a breakdown of the components:
Opening Inventory: The value of the inventory (goods) held at the beginning of the accounting period.
Purchases or Production Costs: The cost of acquiring or producing additional inventory during the accounting period. This includes the cost of raw materials, direct labor, and other costs directly related to production or acquisition.
Closing Inventory: The value of the inventory (goods) remaining at the end of the accounting period.
By subtracting the closing inventory from the sum of opening inventory and purchases or production costs, you can determine the total cost of goods sold during that period.
It's important to note that COGS does not include indirect costs such as marketing expenses, administrative expenses, or overhead costs. These costs are typically accounted for separately as operating expenses.
COGS is reported on the income statement of a company and is used in various financial ratios and performance metrics to evaluate the profitability and efficiency of a business.
Calculation of Cost of Goods sold (As per Audited Format)
Wimax Company limited
Calculation of cost of goods sold
Year-2022 Year-2021
Raw Material consumed xxxx xxxx
Packing Material consumed xxxx xxxx
Total Material consumed xxxx xxxx
Add: Direct wages & allowances xxxx xxxx
Depreciation xxxx xxxx
Add: Factory overhead xxxx xxxx
Cost of Production xxxx xxxx
Add: Finished goods Stock-opening xxxx xxxx
Less: Finished goods Stock-Closing xxxx xxxx
Total cost of goods sold xxxx xxxx