Forums Accounting What are COGS?

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    What are COGS?

    #16539

    Cost of goods sold, also known as COGS are the direct costs. These costs are attributable to the production of the goods of the company. Ultimately it is the cost of the product manufactured and sold by the company or the product purchased and resold by the company. As these are the expenses of the company, thus it reduces the profit of the business.

    What is included in COGS?

    • Cost of raw materials
    • Cost of items purchased for resale
    • Cost of parts used to construct a product.
    • Shipping costs
    • Costs of containers
    • Freight in

    Formula of COGS

    COST OF GOODS SOLD=Beginning Inventory+Purchases-Closing Inventory

    Example

    Max is a clothing and apparel retailer with four different locations. Max specializes in sportswear and other outdoor gear and requires a good supply of inventory to sell during the summer seasons. Max is finishing his year-end accounting and calculated the following inventory numbers:

    Beginning inventory: $10,000
    New purchases: $45,000
    Ending inventory: $3,500

    COST OF GOODS SOLD= 10000+45000-3500
    COGS = $51,500

    ABC Method

    CIMA (Chartered Institute of Management Accountants) defines ABC as an approach to the costing and monitoring of activities which involves tracing resource consumption and costing final outputs.
    It is a method of assigning indirect costs to the products and services which involves finding cost of each activity. It is a more refined approach to assign cost to product.

    Steps of assigning costs-

    1. Identify Activities Involved.
    2. Classification of each activity according to cost hierarchy.
    3. Identification and Accumulation of total cost of each activity.
    4. Identification of most appropriate cost driver.
    5. Calculation of total units of the cost driver relevant to each activity.
    6. Calculation of the activity rate i.e. the cost of each activity per unit of its relevant cost driver.
    7. Application of the cost of each activity to products based on its activity usage by the product.
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