What is a Cost of Goods Sold Statement?

Cost of Goods Sold Statement

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Cost of Goods Sold Statement

A Cost of Goods Sold (COGS) statement, also known as a statement of cost of goods sold, is a financial document that presents the total cost of manufacturing and selling products during a defined period of time. It’s an important part of the overall income statement and helps determine a company’s gross profit.

A COGS statement is typically structured as follows:

  • Beginning Inventory: The value of inventory at the start of the period.
  • Purchases: The cost of inventory purchased during the period.
  • Direct Labor: The cost of labor directly tied to the production of the goods.
  • Manufacturing Overhead: The indirect costs associated with production, such as factory utilities, depreciation of factory equipment, factory lease, etc.
  • Total Available Inventory: The sum of the beginning inventory, purchases, direct labor, and manufacturing overhead. This represents all inventory available for sale during the period.
  • Less Ending Inventory: The value of inventory unsold at the end of the period.
  • Cost of Goods Sold (COGS): The result of total available inventory minus ending inventory. This represents the cost of all inventory that was sold during the period.

The COGS statement provides a detailed breakdown of the different costs involved in the production process, which can be useful for management to understand where the company’s money is going and to identify potential areas for cost savings.

Example of Cost of Goods Sold Statement

Let’s create a hypothetical Cost of Goods Sold Statement for a manufacturing company:

  • Beginning Inventory: $50,000
  • Purchases: $30,000
  • Direct Labor: $40,000
  • Manufacturing Overhead: $20,000
  • Ending Inventory: $25,000

We would put these numbers into the COGS Statement as follows:

  • Beginning Inventory: $50,000
  • Add: Purchases: $30,000
  • Add: Direct Labor: $40,000
  • Add: Manufacturing Overhead: $20,000
  • Total Available Inventory: $140,000 (sum of Beginning Inventory, Purchases, Direct Labor, and Manufacturing Overhead)
  • Less: Ending Inventory: $25,000
  • Cost of Goods Sold (COGS): $115,000 (Total Available Inventory minus Ending Inventory)

So, in this example, the company’s Cost of Goods Sold for the period is $115,000. This means that it cost the company $115,000 to produce the goods it sold during the period. This COGS will then be subtracted from sales revenue on the income statement to calculate the company’s gross profit.

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