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Cost of Goods Sold (COGS) | Definition | Example | Importance - YouTube
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clicking the bell icon friends today we
are going to learn tutor on cost
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of goods sold
now when you heard the cost of goods
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sold there's two things that comes in
mind
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net profit or the gross profit and the
sales so once you deduct when you have
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your net sales and when you deduct your
cost of goods sold
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you get gross profit as you have a
example over here this is one template
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which shows you how the profit and loss
account things work and how cost of
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sales are the cost of goods sold has
been recorded so let's begin cost of
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goods sold is the cost that directly
relates to the production of the goods
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and sold in the company so in other
words Cogs is accumulation of the
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direct cost remember one thing that went
into the goods sold by your company so
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this amount includes the cost of any
materials that have been used in the
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production of goods and also it includes
the direct labor cost used to produce
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the said well. so it's not only the
direct cost but it also includes the
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direct labor. Now labor costs includes
the direct labor as well as the indirect
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labor so the cost of materials which the
next thing the direct costs cost of
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material see you can say DM includes the
direct cost like raw materials as well
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as like supplies, indirect materials, the
non-incidental amounts of these supplies
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are maintained.The taxpayers must keep
inventories of the supplies for the
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income tax purposes charging them to
expenses a good sold or used rather than
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has purchased. Direct labor cost are the wages that have been
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paid to those employees who
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spend all the time working directly on
the product being manufactured so in
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direct labor cost are based the wages
paid to other factory employees
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involved in the production process so
the cost of
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payroll which is the next thing cost of
payroll taxes and fringe benefits are
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generally included in the direct labor
cost but may be treated as overhead cost
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which is known OH. It excludes any
indirect expenses so this thing should
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not be a part of it indirect expenses
such as like sales, cost of
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marketing . In the cost of goods sold
income statement presentation the goods
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sold is basically subtracted from the
net revenues to arrived at the gross
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margin of the business that's what we
saw over here the net sales and we
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deduct cost of sales which by the end
result we receive as gross profit. Now in
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the service industry this include a
payroll cost okay they include payroll
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cost labor charges benefits for the
employees who are directly involved in
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providing these services so any cost
that is associated with indirect
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expenses are excluded from the Cogs
such as like you know you can see
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marketing expenses overhead and shipping fees like for example of the cost of
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sales for laptop the makers would
include cost of material that is
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required for the
parts of the laptop plus the labor cost
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used to assemble the parts of the
labor laptop together so the cost of
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spending the laptop to dealers in the
cost of labour in incurred to sell the
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laptop would be excluded also the cost
incurred on the laptop that are in stock
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remember this thing during the year will
not be included when calculate the cost
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of goods sold
whether the cost a direct or indirect so
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in other words you can see this includes
the direct cost of the producing goods
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or services that are sold to the
customers now let's learn the next
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thing that is impact on Cogs that is
impact on the cost of goods sold see you
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can see the cost of goods sold can be
can also be impacted by the type of the
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costing methodology or the method that
has been used to derive the cost of
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ending inventory so there are one
of the three methods for recording the
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cost of sales inventory during the
period one is called the FIFO method
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first in first out then is lifo that is
last in first out and there is an
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average cost method which is called as
weighted average method which is called
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Ram. So let's consider the impact for the
first one first in first out under this
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method known as
FIFO the first unit added to the cost of
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the goods sold inventory is assumed to
be the first one used thus in
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inflationary condition environment where
the prices are increasing you can see
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that this trend to result lower cost of
goods sold so the cost of goods sold
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will go down or it will be in a lower
hand being charged to the cost of goods
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sold the next is lifo. Under this method is
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known as last in first-out lifo right
to the cost of goods sold inventory is
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assumed to be the first one used thus in
inflationary environment where you can
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see the prices are going down right when the prices are
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increasing this tends to result in
higher cost of goods sold see you can
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see the opposite of impact right the next
is weighted average method or known as
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average cost method. The average cost is
calculated by dividing the total cost of
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the goods ready for the sale by the
total number of units that are ready for
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sale. This gives a weighted average unit
cost that is applied to the units
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available in the closing inventory at
the end of the period. So let's
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understand the next thing that is how to
calculate the cost of goods sold how
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this thing is calculated well in order
for how to calculate the cost of goods
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sold
we must be familiar with the very first
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three familiar with the three terms
the first is beginning inventory okay
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this is basically the total cost of
every product in your inventory
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at the start. This should be
exactly the same as your ending
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inventory from the last year second
that's the second term is the additional
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inventory right.This is the total cost
of the good sold inventory that you have
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purchased during the year.The third is
your ending inventory when you talk
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about any ending inventory this is the
total cost of the goods sold inventory
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at the end of the year. So the formula
goes something like this
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the beginning that is the first as you
can see over here plus any addition that
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is a second is equal to when you do one
plus two you will get the amount as what
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is the amount that we sold what we sold
and when you are add in this the ending
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that is what we end up with you get
therefore that is the cost of goods so
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it's like the beginning inventory plus
you do the addition to the inventory
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less the ending inventory you get your
cost of goods sold so beginning
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inventory plus addition less ending that
gives you your cost of goods sold that's
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the formula for Cogs.
Now let's understand this whole thing
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with the help of an example
inventory let's say it recorded at the
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beginning of the fiscal year let's say
in 2017 is 2000 so this is inventory at
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big. The additional inventory that is add
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inventory purchase during the fiscal
year during 17 and 18 let's say is 1500
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and the ending inventory recorded at the
end of the fiscal year 2018 let's is
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1000. So this should be really very
simple.Let's say calculate the cost of
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the goods sold so as for the cost of the
sales formula cost of goods sold cogs
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should be really very simple over
here so that is nothing it's a beginning
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Plus addition and you deduct the ending
you get your cost of goods sold which is
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your $2,500. Therefore $2,500 is the cost of the good sold.
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Now calculate the cost of the sales
varies depending on whether the
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business is retail wholesale
manufacturing or service business so if
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you talk about retail and wholesale
calculate you can say the cost of sales
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during the reporting period involves the
beginning and the ending inventories this
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of course includes the purchase made
during the reporting period but when we
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talk about manufacturing it involves
finished goods very important inventory
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plus you need to you have raw materials,
inventories, raw material inventories ,goods
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in process inventory, direct Labour's
and direct factory overhead cost. So in
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this case of service business the
revenue is being derived from the
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activities of the individuals rather
than the sale of the product and hence
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calculating the cost of goods sold is
smaller tasks you can say due to the
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lower low level of use of the material
required to earn the income. Let's
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understand the next thing in this
particular tutorial what is the
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importance of Cogs? now these cogs is
important component of the financial
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statement it is deducted from the
company's revenue which we saw the very
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initial inception stage to arrive with
gross profit so the cross profit is a
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measure that evaluates how effectively
the company is managing its operating
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cost in the production process, so cost
of goods sold used by analysts, investors
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managers to focus the company's gross
profit you can say so if your cogs if
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the cost of goods soon if this
particular thing increases your GP that
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is the gross profit will decrease and
the vice versa will go about do - and
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your plus area this vice-versa
case. So business is therefore will be
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able to keep their cost of goods sold
low so that their net profit will be
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higher sometimes they do it for the
window-dressing.
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Cost of goods sold may be used
internally to measure the company's
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success and to determine when
the prices on the particular product
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needs to be increased, so the good sold
can be also be used to set profit
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margins as the basis of your products
prices. Let's understand the next thing
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is what is the limitation of Cogs? this
is easily be adjusted by allocating the
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to the inventory higher manufacturing
cost then was actually incurred so
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adjusting the amount of the inventory in
closing stock at the end of the
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accounting period will lead to over
valuing you can see our valuing
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inventory in stock falling to write off
outdated inventory and extra. When the
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cost of sales inventory is purposely
inflated, cost of goods sold will be
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reduced which in turn will lead to
higher actual gross profit margin and
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hence inflated net income. If you have
learned and you know liked the video if
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