Typically, the per-unit cost of your finished goods is derived by adding the costs incurred to produce a bunch of units and then dividing this cost by the number of units in the batch so produced. Now, it is important for you as a business to calculate the per unit product cost as it helps you in setting an appropriate selling price for your product. or costs incurred in rendering a service to the final users. In the case of services, product cost must include all the costs that are associated with rendering services like employee compensation, employee benefits, and payroll taxes. In terms of services, product cost is the cost incurred on the labour required to deliver the services to customers. These costs include the costs of direct labour, direct materials, and manufacturing overhead costs. Product Cost refers to the costs incurred in manufacturing a product intended to be sold to customers. The cost of goods sold also referred to as Cost of Sales is an important item on the income statement of your company as it helps in determining Gross Profit, a profitability measure that demonstrates the efficiency of your business in managing raw material and labour. Whereas, the closing inventory is the unsold inventory at the end of the current financial year. Therefore, COGS is calculated by adding the beginning inventory and any further purchases made during the year and then subtracting closing inventory from the sum of opening inventory and additional purchases.īeginning inventory is nothing but the unsold inventory at the end of the previous financial year. The indirect costs such as sales and marketing expenses, shipping, legal costs, utilities, insurance, etc. It includes only those costs that are directly incurred in order to manufacture the goods including the cost of labour, raw material, and overhead expenditure related to the manufacturing of goods to be sold. Ĭost of Goods Sold (COGS) refers to the costs associated with acquiring or manufacturing goods to be sold by a company during a specific period of time.

So in this article, let us try to understand what is the Cost of Goods Sold, COGS Formula, and different Inventory Valuation Methods. Thus, the type of method used by a company to value its inventory has an impact on its ending inventory and cost of sales. These include Specific Identification, First-In-First-Out (FIFO), and Weighted Average Cost Methods. International Financial Reporting Standards (IFRS) has stipulated three cost formulas to allow for inter-company comparisons. Therefore, we can say that inventories and cost of goods sold form an important part of the basic financial statements of many companies. Now, in order to record the cost of inventories in the books of accounts, manufacturers can either record the amounts of raw materials, work-in-progress and finished goods separately on the balance sheet or simply showcase the total inventory amount. Therefore, manufacturers classify inventory into three categories: raw materials, work-in-progress, and finished goods Work-in-progress inventory is nothing but the inventory that is still under process and is not yet converted into finished goods to be sold to customers. On the other hand, manufacturers first purchase raw materials from suppliers and then transform these raw materials into finished goods. Merchandisers, including wholesalers and retailers, account for only one type of inventory, that is, finished goods as they purchase the ready for sale inventory from manufacturers. For such companies, inventory forms an important asset on their company balance sheet. Merchandising and manufacturing companies generate revenue and earn profits by selling inventory.

Cogs equation accounting