Cost of Sale
Introduction
Cost of goods sold (COGS) refers to the value of goods sold during a particular accounting period. It is a metric that shows the direct costs attributable to the production of goods sold or services provided.[1] This includes the cost of materials used to create the good, along with the direct labor costs used to produce the good or service "Service (economics)").
The cost of goods sold is often calculated using this formula:[2].
Costs are associated with particular goods using one of several formulas, including specific identification, first in, first out (FIFO), or average cost. Costs include all purchase costs, conversion costs, and other costs incurred to bring inventories to their current location and condition. The costs of goods made by businesses include material, labor, and allocated overhead. The costs of those goods not yet sold are deferred as inventory costs until the inventory is sold or written down to value.
Overview
Many companies sell products that they have purchased or produced. When goods are purchased or produced, the costs associated with those goods are capitalized as part of the inventory (or stock) of goods.[3] These costs are treated as an expense in the period in which the company recognizes revenue from the sale of the goods.[4].
Determining costs requires keeping records of the goods or materials purchased and any discounts on that purchase. Additionally, if the goods are modified,[5] the company must determine the costs incurred in modifying the goods. Such modification costs include labor, additional supplies or material, supervision, quality control, and use of equipment. The principles for determining costs can be easily established, but application in practice is often difficult due to a variety of considerations in cost allocation.[6].
The cost of goods sold may also reflect adjustments. Potential adjustments include a decrease in the value of the goods (i.e., lower market value than cost), obsolescence, damage, etc.
When multiple goods are purchased or manufactured, it may be necessary to identify which costs relate to which particular goods were sold. This can be done using an identification convention, such as asset-specific identification, first-in, first-out "FIFO and LIFO (accounting)") (FIFO), or average cost. Alternative systems may be used in some countries, such as the last-in "FIFO and LIFO (accounting)") (LIFO), the gross profit method, the retail method, or combinations of these.