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income statement and can be deducted from revenue to calculate a company's gross margin. The cost of goods sold includes net direct inventory cost and
labour expense, factory overhead, office and administration overhead but does not includes indirect cost related to selling and distribution overhead.
For manufacturing industry, COGS refers to buying of raw material & expense for manufacturing finished goods. For retailers, it is the cost of
obtaining or buying the products sold to customer. If the company is in a service industry, COGS is the cost of the service it offers.
In simplest method, COGS denotes value of inventory at the begging of specified period plus purchase of inventory less inventory at the ending of specified
period. For accounting theory, this for is widely used. Different technique used for First in First out (FIFO) and Last in First out (LIFO) inventory
control technique.
Therefore COGS = Opening Inventory + Purchase value of inventory – Closing Inventory.
Under cost accounting technique, COGS calculate following process
Particular | Amount | Amount |
Operating stock of raw material Add Purchase of raw material Carriage charge at the time of raw material purchase Fright charge on raw material Less Closing stock of raw material Material return to the supplier Abnormal loss on raw material | ||
RAW MATERIAL CONSUMED | ||
Add Direct wages Direct expense Chargeable expenses | ||
PRIME COST | ||
FACTORY OVERHEAD Factory Overhead Indirect wages Indirect expense or material Oil Waste Power, fuel, coal, gas, electricity etc Factory rent and insurance Works stationery Depreciation on Furniture, factory building Supervisor or works manager salary Factory canteen & recreation expense Worker training and recruitment Expense of purchase department Cotton, grease Worker compensation Normal loss of material Research expense Normal idle time cost (exclude abnormal cost) Security Store supervisor expense Expense of service department Some other expenses related to factory Less sale of scrap Add Opening working progress Less closing working progress | ||
WORKS COST / FACTORY COST | ||
OFFICE AND ADMINISTRATION OVERHEAD Office rent Depreciation on office furniture Manager salary Office staff salary Office printing and stationery Office rent and taxes Office building insurance Office lighting and heating Advertisement Telephone & postage expenses Director fees Depreciation related to office furniture, building, equipment Sundry office expense Salaries for accounting office Repair of office assets Audit fees and legal expenses Subscription of trade association Bank expenses Subscription to newspaper, journal Salary of general manager Other expenses related to office | ||
COST OF PRODUCTION | ||
Add opening finish goods Less closing finish goods | ||
COST OF GOOD SOLD / COST PRODUCTION OF GOOD SOLD |
