Overview of Cost of Goods Sold Example
Cost of Goods Sold refers to the costs incurred to produce goods or services, which have been sold. While calculating the Cost of Goods Sold example (COGS), the cost to produce goods and services that are not sold is excluded. Cost of Goods Sold also excludes indirect expenses.
Cost of Goods Sold (COGS) = Opening Inventory + Purchases During the Period – Closing Inventory
Examples of Cost of Goods Sold (With Excel Template)
Let’s take an example to understand the calculation of the Cost of Goods Sold in a better manner.
Cost of Goods Sold – Example #1
Patrick Inc. has the financial year beginning 1st January 2018 and ending 31st December 2018. Its inventory at the beginning of the year is $15,000. During the year, it makes purchases worth $35,000. Its inventory as on 31st December 2018 is $5,000. Calculate the Cost of Goods Sold (COGS) during the year.
Solution:
Cost of Goods Sold (COGS) = Opening Inventory + Purchases During the Period – Closing Inventory
- COGS = Inventory as on 1st January 2018 + Purchases during the period – Inventory as on 31st December 2018
- COGS = $15,000 + $35,000 – $5,000
- COGS = $45,000
The Cost of Goods Sold (COGS) during the year is $45,000.
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Cost of Goods Sold – Example #2
Kelly Inc. buys and sells refrigerators. The company buys Refrigerator A and Refrigerator B for $1,000 each. Then, it buys Refrigerator C and D for $1,100 each. Finally, it buys refrigerator E for $1,200. It then sells Refrigerator A and D. There are no refrigerators in Opening Stock.
Calculate the Cost of Goods Sold under:
- Specific Identification Method
- FIFO Method
- LIFO Method
Solution:
Under the Specific Identification method, we compute the costs of the refrigerators sold, which are A and D.
# Specific Identification Method
Cost of Goods Sold (COGS) is Calculated as:
Cost of Goods Sold = Cost of Refrigerator A + Cost of Refrigerator D
- COGS = $1,000 + $1,100
- COGS = $2,100
Thus, the Cost of Goods Sold under the Specific Identification Method is $2,100.
Under the FIFO method, we assume that the refrigerators that are bought first are sold first. The costs of Refrigerator A and Refrigerator B are $1,000 each
Cost of Goods Sold (COGS) is Calculated as:
Cost of Goods Sold = Cost of Refrigerator A + Cost of Refrigerator B
- COGS = $1,000 + $1,000
- COGS = $2,000
Thus, the Cost of Goods Sold under FIFO method is $2,000
Under the LIFO method, we assume that the refrigerators which are bought last are sold first.
Cost of Goods Sold (COGS) is Calculated as:
Cost of Goods Sold = Cost of Refrigerator D + Cost of Refrigerator E
- COGS = $1,100 + $1,200
- COGS = $2,300
Thus, the cost of goods sold under LIFO method is $2,300.
Cost of Goods Sold – Example #3
Hillary runs a cake shop. She has no cakes at the beginning of April. Below are some of the transactions:
- April 4 – She buys 500 cakes at $2 each
- April 10 – She buys 1,000 cakes at $3 each
- April 15 – She sells 400 cakes at $5 each
Compute the Cost of goods sold under the FIFO and LIFO method. Also, calculate the Gross Profit and value of Closing Stock under both the methods.
Solution:
Under the FIFO method, the 400 cakes are sold from the first lot of 500 cakes bought on April 4.
FIFO Method
Cost of Goods Sold (COGS) is Calculated as:
- COGS = 400*$2
- COGS = $800
Sale Value is Calculated as:
- Sale Value = 400*$5
- Sale Value = $2,000
Gross Profit is calculated using the formula given below
Gross Profit =Sale Value – COGS
- Gross Profit =$2,000 – $800
- Gross Profit =$1,200
While calculating Closing Stock, we have 100 cakes (500-400) from the lot purchased on April 4 and 1,000 cakes from the lot purchased on April 10.
Closing Stock is Calculated as:
- Closing Stock = 100*$2 + 1,000*$3
- Closing Stock = $200 + $3,000
- Closing Stock = $3,200
LIFO Method
Under LIFO method, the 400 cakes are sold from the lot purchased on April 10.
Cost of Goods Sold (COGS) is Calculated as:
- COGS = 400*$3
- COGS = $1,200
Sale Value is Calculated as:
- Sale Value = 400*$5
- Sale Value = $2,000
Gross Profit is calculated using the formula given below
Gross Profit =Sale Value – COGS
- Gross Profit = $2,000 – $1,200
- Gross Profit =$800
While calculating Closing Stock, we have 600 cakes (1000-400) from the lot purchased on April 10. In addition, we have the whole lot of 500 cakes purchased on April 4.
Closing Stock is Calculated as:
- Closing Stock = 600*$3 + 500*$2
- Closing Stock = $1,800 +$1,000
- Closing Stock = $2,800
Cost of Goods Sold – Example #4
Eat Hungry Ltd is a biscuit shop. It carries out the following transactions in June:
- June 3 Purchase of 300 biscuits @ $4 each
- June 6 Purchase of 200 biscuits @ $3 each
- June 7 Sale of 100 biscuits @ $10 each
Calculate the Cost of Goods Sold on the basis of the Weighted Average Cost Method and the resultant Gross Profit.
Solution:
Weighted Average Cost is Calculated as:
- Weighted Average Cost = 300*$4 + 200*$3
- Weighted Average Cost = $1,200 +$600
- Weighted Average Cost = $1,800
Total Number of Units Purchased is Calculated as:
- Total Number of Units Purchased = 300 + 200
- Total Number of Units Purchased = 500 units
Cost Per Unit is Calculated as:
- Cost Per Unit = $1,800/500
- Cost Per Unit = $3.6 per unit
Cost of Goods Sold is Calculated as:
- Cost of Goods sold = 100*$3.6
- Cost of Goods sold = $360
Sale Value is Calculated as:
- Sale Value = 100*$10
- Sale Value = $1,000
Gross Profit is calculated using the formula given below
Gross Profit =Sale Value – COGS
Gross Profit = Sale Value – Cost of Goods Sold
- Gross Profit = $1,000 – $360.00
- Gross Profit = $640
Thus, the Cost of Goods Sold is $360 and the gross profit is $640.
Conclusion
The purpose of calculating the Cost of Goods Sold is to find the Gross Profit. The organization can also compare the Gross Profit Margin with that of its competitors. But, while interpreting the Cost of Goods Sold, certain factors need to be kept in mind. The Cost of Goods Sold depends upon the valuation method of inventories used. Thus, First in First Out (FIFO), Last in First Out (LIFO) and Weighted Average gives different results for the Cost of Goods Sold. Care should be taken that the inventory valuation method used is consistent with the prescribed Accounting Standards if it is used for external reporting. All inventory valuation methods have their own advantages and disadvantages. For instance, when the FIFO method is used and there is inflation in the country, the prices used for calculating COGS are lower and outdated. Similarly, the LIFO method is not allowed to be used by Accounting Standards prescribed in various countries.
COGS can also be computed while preparing a budget and then comparing the actual results with the budget. If there are variations between the COGS number obtained for preparing a budget and the actual results, the reasons for the same should be found out and corrective action should be taken in the next period.
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