## Friday 18 January 2019

A Cost of goods sold (COGS) is the calculation that measures the managerial costs directly incurred in the produce products sold during a given period. In other words, the cost of goods sold or COGS is the amount of the cost incurred by the company for labor, material and overhead in the process of making a product or service that is sold to customers throughout a period.

It needs to be emphasized that the cost of being entered into the cost of goods sold (COGS) is the direct costs associated with the product being sold. While indirect costs cannot be enter into the calculation of the COGS. The purpose of the calculation of the COGS is to measure the true cost in produce purchased the merchandise the customer for a certain period.

Calculation of cost of goods sold or COGS is essential for management because it helps management to analyze how well they control the purchase cost and the cost of Labor (wages). The Creditors or Investors can also use the cost of goods sold (COGS) to calculate the gross margin of the business (gross margin) and analyze how the percentage of income that is still available to cover its operational costs. Manufacturer or retailer (retailer) will certainly take note of the cost of goods sold into the income statement as revenue on load directly after a certain period. Cost of goods sold or COGS then deducted from the Total Income to know margins are Dirty.

## Cost of goods sold formula (COGS) and how to calculate COGS

The COGS formula calculated by adding net purchases to inventory a certain initial period and then eliminate it with inventory for the period. Following this is the formula of cost of goods sold (COGS)

COGS = Initial Inventory + Net Purchases – Ending Inventory

### Example of calculation of COGS (cost of goods sold) for trading companies

A retail store that sells children's toys that are currently completing the final year of its financial statements and calculate the amount of supplies as shown in the following data:

Note:

Beginning inventory = \$ 200 million,-
new purchase = \$ 500 million,-
ending inventory = \$. 100 million, -

Solution:

(1) COGS = Initial Inventory + Net Purchases – ending inventory
= COGS \$ 500 million + \$. 200 million – \$. 100 million
(2) COGS = \$. 600 million, -

So, the Toys retail store selling merchandise amounting to \$. 600 million, -during this year and leaving only the goods with a value of \$. 100 million, -on 31 December.

This information not only helps the retail store to plan purchases for next year but will also help him evaluate the costs. COGS can also give you information about the sales margin for each product when created classification for each category of products. Thus, management can find out which products are most profitable and generate the most money.

### Calculation of COGS (cost of goods sold) for manufacturing company

A little different from the cost of goods sold, cost of goods trading company manufacturing company requires a more complicated calculation with multiple stages so that the results of the calculations are more accurate and precise. The following are some of the stages are needed to calculate cost of goods sold (COGS) manufacturing company.

#### Phase I: calculate the raw materials used

Raw materials used can be calculated with the following formula:

The raw materials used = the initial raw material Inventory + Purchases raw materials – Supplies of raw materials the final

#### Phase II: Calculating The Cost of Production

Production costs can be calculated with the formula below:

The total cost of production = raw materials used direct labor cost + + production overhead costs

#### Phase III: Calculate The Cost of Goods Production

To calculate the cost of goods production, needed formula as below:

The price of the Staple Production = Total production costs + inventory of goods in process of production early – supplies of goods in process of production

#### Stage IV: Calculate The Cost of Goods Sold

The final stage is to calculate the cost of goods sold, the formula used is as follows:

COGS = cost of goods production + the initial inventory – inventory items end

### Example of calculation of COGS (cost of goods sold) for manufacturing company

A company engaged in manufacturing electronic devices manufacture has a stockpile of raw materials amounting to \$. 200 million, intermediate goods (goods in process of production) of \$300 million and inventories of Finished Goods (finished goods) that ready for sale \$ 400 million beginning in 2017. In the same year, the company bought raw materials amounting to \$ 900 million with shipping costs of \$. 50 million. Labor costs and engine maintenance during the year 2017 is \$. 100 million. At the end of the year 2017, the rest of the use of raw materials is \$. 100 million, the remaining inventory in process of 100 million and the remainder of the goods so the product can be sold is \$. 200 million. What is the cost of goods sold or the company COGS?

Note:

The initial raw material inventory = 200 million
The Inventory items in the process of beginning
(1) Inventory 300 million = finished goods early = 400 million
(2) purchase of the starting material = 900 million
(3)shipping cost = 50.000.0000
(4) Labor costs and engine maintenance = 100 million
(5) Inventory of raw materials the final = 100 million
(6) Inventory of goods in process = 100 million
(7) inventory items End = 200 million

Calculation of cost of goods sold for an example of this case should be calculate through 4 stages as mention previously.

#### Phase I: calculate the raw materials used

The raw materials used = the initial raw material Inventory + Purchases raw materials – Inventories raw materials end of the
A raw materials used = 200 million + (900 million + 50 million) – 100 million
raw materials used = 1.05 billion

#### Phase II: Calculating The Total Cost of Production

(1) The total cost of production = + raw materials used direct labor cost + overhead costs of production
(2) Total production cost = 1.05 billion – 100 million
(3) Total cost of production = 950 million

#### Phase III: Calculate The Cost of Goods Production

(1) The price of the Staple Production = Total production costs + inventory of goods in process of production early – supplies of goods in the process of final production
(2) cost of goods Production = 950 million + 300 million – 100 million
(3) cost of goods Production = 1.15 billion

#### Stage IV: Calculate The Cost of Goods Sold

(1) COGS = cost of goods production + the initial inventory – inventory end
(2) COGS = 1.15 billion 400 million – 200 million +
(3) COGS = 1.35 billion.