What is the cost of goods sold?

The cost of goods sold is a financial book value that is part of the company's income statements. This value represents the cost of all the goods that a company sold during a given period of time. By calculating the cost of all goods that were purchased from a manufacturer and then resold, a company can calculate its gross profit on sales and ultimately its net profit. The cost to the company is the actual price paid to the manufacturer for the items.

There is a basic formula involved in calculating the cost of goods sold. Opening inventory, purchases, cost of goods available for sale, and ending inventory values ​​are required to arrive at the value on the income statement. Starting inventory is added to purchases to arrive at the cost of goods available for sale; this is the cost to the business of all products offered for sale to its customers. The closing value of inventory, the value of unsold inventory that is still available at the end of the accounting period, is subtracted from the cost of goods available for sale. The resulting value is the cost of goods sold, which it cost the company to sell the products that customers purchased during that period.

Sometimes other items are part of the cost of goods sold formula. These other items include returns and purchase bonuses. Other possible elements include purchase and shipping discounts.

Purchase returns and rebates occur when a company returns merchandise that has already been purchased because it deems the products to be unsatisfactory. Alternatively, the company can request a price allocation for the commodity. Purchase discounts can occur when a company receives a cash discount for immediate payment for goods purchased on credit. Inbound transportation is the transportation fees that a company may pay to bring goods into its facility.

Consequently, a modified cost of goods formula is produced. The change is on the shopping side of the equation. To arrive at an actual purchase value, a company would deduct any purchase returns and rebates and purchase discounts received from a supplier. You would then add the shipping fees you paid to bring the products to your door. This becomes the actual cost of purchases.

For a manufacturing company, the cost of goods sold is the manufacturing cost – the cost of materials and labor needed to manufacture a product. This number tells a manufacturing company how much it costs to create a product that will be sold to an intermediary entity, such as a wholesaler or retailer. These entities then resell the product to other companies or consumers, who are the end users of the product.