Cost of Goods Sold Formula, Calculator, Example and Importance

A businessman needs to calculate a lot of things before starting up a business. A business, on the other hand, is broadly an investment, an investment which is known as capital. This capital is called the mother of a company. The money with which an individual starts a business counts on it to make it double, which is known as profit. Profits are something which can never be fixed; however, as it depends entirely upon the market demand and the supply of them. The rules of the economy play a vital role in that. However, to understand the Cost of business well, it is suggested to follow the Cost of goods Sold.

Concept of Cost of Goods Sold:

The Cost of goods sold also known as sales cost or Cost of services. It is often considered as the Cost to produce your products. Price of goods sold also include labor expenses and direct material cost. While you calculate the Cost of goods sold, the cost which create goods and services and are never included, which you never sell. However, if you own a company which deals with furniture, the Cost of products sold will consist of the Cost of wood, screws, glass, hinges paint, and labor. But the electricity charges needed to market the cabinet that your company produces will not be included.

Processes:

An individual use the Cost of goods sold during an accounting period, by a specific method is used, which is discussed below. To calculate the Cost of products sold there are few things that need to be incorporated such as the beginning of the inventory, purchase during the period, the total of the summation of these two must be subtracted from the ending inventory. This can be considered as the beginning of an inventory that should be whatever was left from the previous period. Once dome you need to add whatever you have purchased during the period, then subtract with whatever stock you couldn’t sell.

Example:

The way of calculating the Cost of products sold can be explained with an example. With a proper exemplified manner, it is possible for you to understand the ways that it must incorporate. Considering that you run a business which follows the calendar year for recovering inventory. However, it is taken on account that your list was recorded on January 1st while the ending stock is marked on December 31st. Now consider that your business has a beginning inventory of \$11000 out of which you have purchased goods of worth \$ 8000.

While you left with an ending list of \$4000, now you can calculate the Cost of products sold using the formula discussed above. That is your beginning inventory, and the value of purchasing must be the summed which in this case makes \$19000, and then must the subtracted from the ending, which makes it \$15000. So, \$15000 is the Cost of your goods sold for the year. It is essential for you to know as depending on this you will have to take a lot of decisions, which includes finding new vendors if you need any. Any room of improvement for the propagation of your business.

Importance:

If you are a business person than you know that product pricing is one of the most important tasks you need to do, which is the price you will need to sale to the customers. Your business can have a healthy profit margin, once you know the Cost of the goods you sold. While you determine the price, there are a lot of things you need to consider. However, once you learn the price, it is possible to determine the gross profit of your business. Once you know the gross profit, it is possible to identify the net income that is the profit. However, there is a total profit formula that is calculated to know the net income. This process works like gross income, which is equal to gross revenue, while on the other hand, it is the net income, which is similar to the Cost of goods sold.

Accounting for the Good Sold:

While you are running a business, it very much essential to keep a strict record, along with the financial statements. Irrespective of your business be it small medium, or on a large scale, it is mandatory to do counting of sales cost. This is because your Cost of products sold will play a vital role in your business, whether you are preparing a balance sheet or a list of business inventory which are under current assets.

Cost of Goods Sold and Operating Expresses are Different:

However, it is essential to maintain a ledger and the complete balance sheet when it comes to keeping business records. But most people somewhere mistake Cost of goods sold with operating expenses. There is a vast difference between Cost of products sold and operating expenses. Operating expense and Cost of sold measures the revenues that companies incur during the processes. Operating expenses are not, however, directly tied up with the production of the goods or services. Cos of products sold, on the other hand, measure the resources of that are either spent or gained. However, Cost of goods sold is very much needed for a business to maintain. To make an industry propagate and to make it grow, it is mandatory to keep the proper sales cost. A company may be about many a thing, be service or products or retail, it essential to know the Cost the affects the business.

However, to know the Cost they are to be put on the goods which are to be sold, it mandatory to do a detailed evaluation of the Cost of goods sold. However, from the earliest of early civilization business strategies have evolved a lot. However, the act itself never changes. Lot theories and assumptions made business propagate, but Cost of goods sold is one of its kind.

Natraj

Natraj Studied bachelor's degree in finance and business from Telangana University, Nizamabad. A Writer based In India, He has a degree in Charted Accounts and has very knowledgeable in credit repair and Banking Sectors. So, I decided to start a blog and share my knowledge to the visitors.