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by Team Lapaas | Aug 21, 2020, | Strategy | 0 comments

2 Minute Summary

COGS stands for Cost Of Goods Sold. It is the cost that a company pays to produce its product or service. All companies incur/bears the cost in the creation of their products. The labour, material, and operating costs, such as building rentals and utility expenses, contribute to the COGS calculation and the final product’s final price. Calculating the COGS (Cost Of Goods Sold) or the cogs formula for the services or the products you sell or manufacture can be very hard or complicated some times, RIGHT?  Basically, it all depends on the number of products as well as the rigidity or complexness of the manufacturing process. It becomes easier as you practice it, so keep practising and keep visiting our website for many more amazing and informative blogs. Full Detail in Blog.

Do you want to know what is cogs? Want to know what is cogs meaning? Want to know how to do cogs calculation? Want to know why it is important for you? Want to know how it will help you grow your business?

Well, you got yourself at the most right place to get information about COGS.

If your business sells Services or product then, you need to know how to do COGS ( Cost of Good Sold) calculation. Basically, this calculation includes all the things involved in cost to make the sales. 

What’s in it for me?

  1. What is COGS?
  2.  COGS And Gross Profit
  3.  Accounting Method of COGS
  4. Conclusion
  5. FAQs

What is COGS Meaning?

COGS stands for Cost Of Goods Sold. It is the cost that a company pays to produce its product or service. All companies incur/bears the cost in the creation of their products.

The labour, material, and operating costs, such as building rentals and utility expenses, contribute to the COGS calculation and the final product’s final price.

For example, Let’s say you are buying a smartphone, and the price of the smartphone is 1000 bucks. But, the part of the price consists of COGS which includes the following-

  • The cost of the items used to make the smartphone such as processor, ram, battery, machines need to assemble the phone. Also, the electricity to run the whole plant.
  • Labour’s salary to pack the cell phone all these costs associates with the actual creation of the product that includes in the COGS calculation.
  • Transportation, advertisements or sales are not part of the COGS calculation.

To understand more clearly, let’s take a real-world example 

Which of the following companies do not have the cost of goods sold in their income statement?

  1. Apple
  2. Facebook
  3. Patanjali
  4. Pantaloons

If you say “Facebook” then yes!! You’re right because the COGS only applies to those enterprises that have something to sell like physical goods.

COGS And Gross Profit

Do you want to know how does Gross Profit related to the Cost Of Goods Sold? The big question right? So, to understand this, let me give you an example. 

Let’s say you are full of ideas, you like to invent stuff, and suddenly you have come up with the breakthrough product and got a prototype working 

However, your strength is really in designing, not manufacturing or selling.

So you get somebody else to do the manufacturing of your product for you. They produce goods according to your specifications, ship them, and you pay them the cash on delivery.

You also get somebody else to sell off the product to customers. You ship the goods to the retailer, but instead of retailer paying you instantly, you will receive the payment after 30 days.

This month, You buy 100 units at 80 bucks each and sell 50 units at 100 bucks each. So how much profit do you make? What do you think? Well, let us help you with the calculation.

See, you deliver and sell 50 units at 100 bucks each, so your revenue is 5000 bucks. The cost of sourcing(making) those 50 units that you have now sold is 50 units at 80 bucks each. So, your cost of goods sold is 4000 bucks. 

In short, you sell 50 units at 20 bucks margin per unit, So, you generate a profit of 1000 bucks. But wait, didn’t you buy 100 units and only self 50?

Yes! You haven’t sold those 50 units yet. So, it is still remaining at a value of 4000 bucks.

Wow, That means you still have a long way to go in this business.

Cost Of Goods Sold Formula [CoGS Formula]

Look at this another way of finding the same numbers by using CoGS Formula

It goes like this-

Beginning inventory ( which is ZERO in this case)+Purchases (this is 8000 bucks)–Ending inventory ( of 4000 bucks)= 4000 bucks (Which is the Cost Of Goods Sold)

The Important variables here are the value of the beginning of the inventory and the ending inventory Why?

Because, In the end, just remember one thing, when you have the Net sales of your business than just Deduct the COGS (Cost Of Goods Sold) and then you’ll have the Gross Profit. NET SALES – COGS = Gross Profit. 

Accounting Method of COGS

This is another way to do the COGS calculation, and the first method is LIFO, and the second one is FIFO.

LIFO stands for “Last In First Out”

and 

FIFO stands for “First In First Out”

Both LIFO and FIFO are the cost accounting Frictions that can lead to very different numbers of Cost Of Goods Sold and Gross Profit.

Let’s work through a visual example of FIFO and LIFO. Inventory Valuation — LIFO vs. FIFO

We will do the inventory accounting for a hypothetical company, Toy Giraffe INC. As the name suggests, this company buying and selling Giraffe toys. While reading the example, don’t break the flow and order of reading or else you may find it a bit confusing. We don’t want you to get confused, we care for you, so we request you to read this information with total attention.

First Quarter

In the first quarter of the year, toy giraffe inc is building up its inventory. In January, they buy 1000 units (packed in 2 boxes 50 each) at 5 bucks per unit. 

Suppose in February, 200 units (4 boxes of 50 each) at 6 bucks per unit.

And in March, another 100 units ( 2 boxes of 50 each) at 7 bucks per unit. The quarter 1 ending inventory is 400 units at a total purchase price of 2400 bucks, so on average 6 bucks per unit. In the warehouse, the company does not explicitly identify the boxes. They just stack them up on a big pile(like a big big pile).

For accounting and inventory valuation purposes, the company does keep track of the timing of the buys as well as the unit cost.(Irresponsible company, right?)

Second Quarter

Then we go to April, the ending inventory of Q1 is the beginning inventory of Q2. The visual presentation if the FIFO inventory flow is at the top, LIFO at the bottom.

They sold the first box of toy Giraffes (50 units) in April with FIFO (First In First Out). We will assume that they sold the oldest inventory first: one of the boxes purchased in January. 

But with LIFO (Last In First Out), We assume that they sold the newest inventory first: one of the boxes purchased in March.

Two boxes of toy Giraffe are sold in May.

With FIFO, we assume that they sold the oldest inventory first: the last of the boxes purchased in January and one of the boxes brought in February.

But with LIFO, we assume that they sold the newest inventory first: the last of the boxes purchased in March and one of the boxes brought in February.

Four boxes of Giraffe are sold in June.

With FIFO, we assume that they sold the oldest inventory first: the remaining three boxes are brought in February, and one box is purchased in March.

What stays in inventory at the quarter-end under FIFO is one box they purchased in March. But with LIFO, we assume that the newest inventory gets sold first: the remaining three boxes brought in February and the one box purchased in January.

What stays in inventory at the quarter-end under LIFO is one box purchased in January. I’m hoping that you have understood it correctly, and if not, kindly just read it again with a little more attention. I’m pretty sure that you will get the point for sure.

Conclusion

Calculating the COGS (Cost Of Goods Sold) or the cogs formula for the services or the products you sell or manufacture can be very hard or complicated some times, RIGHT?  Basically, it all depends on the number of products as well as the rigidity or complexness of the manufacturing process.

It becomes easier as you practice it, so keep practising and keep visiting our website for many more amazing and informative blogs.

We hope that you now got the actual idea of what cogs is, what is cogs calculation, what is cogs meaning and all the accounting methods for cogs calculation. But if you still have any doubts left, don’t worry, we got your back!

Go through the below FAQ section to clear each and every doubt of yours regarding cogs.

FAQs

  1. What is the COGS formula?

There are three steps to find out the COGS but there is another way also and that is the putting formula into the figures.
The formula for the COGS Calculation ( Cost Of Goods Sold) is 
Starting inventory + Purchases – Ending inventory = COGS ( Cost Of Goods Sold).

  • How do you calculate the Cost Of Goods Sold(cogs) per unit?
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Let’s say you have $20,000 in Cost Of Good Sold, which goes to the income statement. To calculate the COGS per unit, divide the total cost by the units sold. Let’s say you have a total cost of $20,000, and you have sold the 4000 units at $3 (hypothetically). What you need to do is $3 ($20,000 / 4000 units), so the answer will be the COST per unit. 

3. How do you find the average COGS?

To find the average COGS, you take the opening inventory balance as well as the purchases that you have done in a period of time to find the average cost. The average price per unit is used to find the COGS and the Closing Inventory Balance.

  • How to calculate COGS calculation from gross margin?

If you want to find the gross margin, just remember Net sales – COGS = Gross profit. Now, what you need to do is ( Net sales – COGS ) / Total Revenue. And to find margin (Total Revenue – COGS) / Total Revenue x 100 

  • How to calculate the cost of goods sold(cogs) from the income statement?

First, you need to know the COGS formula COGS = beginning inventory + purchases – ending inventory
Gross income = gross revenue – cogs and then NET income = revenue – cogs – expenses.

  • Cost Of Goods Sold formula in excel? 

The COGS formula COGS = beginning inventory + purchases – ending inventory
Let’s say beginning inventory = 9000, purchases = 2000 and the ending inventory is 8000
So COGS = 9000+2000-8000 = 3000
The cost of goods sold will be 3000.

  • What is the difference between COGS and operating expenses?

Operating expense is the expanse cost that is not included in the price of goods sold cogs and on the other hand cogs( Cost Of Goods Sold) labour, Material and the operating cost such as building rentals and utility expenses contribute to the COGS calculation.