Section 2: Cost of Goods Sold Calculation
To calculate the Cost of Goods Sold (COGS) for a merchandiser, it is necessary to subtract the cost of the inventory sold during a specific period from the net sales. COGS represents the direct expenses incurred in producing or acquiring the products that were sold.
The first step in calculating COGS is to determine the beginning inventory, which refers to the value of the goods on hand at the start of the accounting period. These are the products that were not sold in the previous period. The beginning inventory figure can be obtained from the company’s records or by conducting a physical count of the inventory.
The next step involves adding the cost of new inventory purchased during the period. This includes the cost of merchandise acquired for resale, transportation fees, customs duties, and any other expenses directly associated with obtaining the inventory. These costs are usually recorded in the purchase account or inventory account.
Once the beginning inventory and the cost of new purchases are known, the merchandise available for sale during the period can be calculated. This value is obtained by summing up the beginning inventory and the cost of new purchases.
To determine the ending inventory, the value of the unsold goods at the end of the period needs to be determined. This can be done by conducting a physical count or using the perpetual inventory system, which continuously tracks inventory levels. The ending inventory represents the cost of the goods that remain unsold at the end of the accounting period.
Finally, the COGS can be computed by subtracting the ending inventory from the merchandise available for sale. The formula for calculating COGS is:
COGS = Beginning Inventory + Purchases – Ending Inventory
Once the COGS has been calculated, it can be subtracted from the net sales to determine the gross profit. Gross profit is the amount of revenue remaining after deducting the direct costs associated with the production or acquisition of the goods sold.
Calculating COGS accurately is essential for a merchandiser as it allows them to evaluate the profitability of their business operations. It provides insights into the efficiency of inventory management, purchasing decisions, and pricing strategies. Additionally, the COGS figure is required for financial reporting purposes, such as the income statement, and is also utilized in tax calculations.