![]() ![]() The IRS has set specific rules for which type of method a company can use and when to make changes to the inventory cost method. The calculation for COGS depends on the inventory costing method used by a company. Accounting Methods for Cost of Goods Sold Thus, the total COGS in the 1st quarter of 2022 is $34,000. If the company has a beginning inventory of $30,000 and the purchases totaled $12,000 for that quarter, and the ending inventory is $8,000, then the total COGS of XYZ Company for that quarter will be: Let us say XYZ Company wants to calculate COGS in the first quarter of 2022. The formula for COGS is: Calculating Cost of Goods Sold Subscribe to the Finance Strategists YouTube Channel ↗ Cost of Goods Sold FormulaĬOGS shows the expenses incurred in producing the goods over a certain period of time. There are also some cases that businesses, specifically service companies, do not have COGS and inventories, thus, no COGS are displayed on their respective income statements. This relationship portrays how COGS is used to assess how efficient the company is in managing its supplies and labor in production. With the same selling price of bath soap, this helps your company increase your margin without jeopardizing quality. If your company can find other suppliers of soap ingredients that you can only spend $4 on ingredients per bath soap, then the COGS will be reduced to $6 per bath soap. Lowering COGS is one way to increase the gross profit of your company since COGS are variable costs. The ideal selling price should be at least greater than $7 to make a profit since it needs to account for both COGS and the additional indirect costs like marketing and shipping. So, your company is spending a total of $7 to create the soap. You also have to spend $1 per bath soap on the labor required to craft it and $1 for packaging. To produce a bath soap, your company has to spend approximately $5 per soap on ingredients such as soap base, fragrance, and additives. Let us say that you are selling bath soaps. It does not include indirect expenses, such as sales force costs and distribution costs. This includes direct labor cost, direct material cost, and direct factory overheads. To close these debit balance accounts, a credit is required with a corresponding debit to the income summary.Cost of goods sold is the direct cost incurred in the production of any goods or services. Cost of Goods Sold has a normal debit balance because it is an expense. Sales Discounts and Sales Returns and Allowances are both contra revenue accounts so each has a normal debit balance. To close Sales, it must be debited with a corresponding credit to the income summary. Sales is a revenue account so has a normal credit balance. When preparing closing entries for a merchandiser, the income statement accounts unique for merchandisers need to be considered - Sales, Sales Discounts, Sales Returns and Allowances, and Cost of Goods Sold. The closing procedure for merchandising companies is the same as for service companies - all income statement accounts are transferred to the Income Summary account, the Income Summary is closed to Retained Earnings, and Dividends are closed to Retained Earnings. The process of recording closing entries for service companies was illustrated in Chapter 3. ![]()
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