Cost of Goods Purchased
The Cost of Goods Purchased refers to the direct costs of producing the goods sold by a company. This amount includes the cost of the raw materials and supplies that are directly tied to the production of goods. It is an important figure for businesses because it reflects the cost of the inventory that the company has purchased during a specific period.
In a retail or wholesale business, the Cost of Goods Purchased is typically the cost of inventory bought from manufacturers or suppliers for resale. In a manufacturing business, it might include raw material and component costs.
The Cost of Goods Purchased is used in calculating the Cost of Goods Sold (COGS), which is an important figure on the income statement. The basic formula for COGS is:
COGS = Beginning Inventory + Cost of Goods Purchased – Ending Inventory
Where:
- Beginning Inventory is the inventory at the start of the period.
- Cost of Goods Purchased is the cost of inventory bought during the period.
- Ending Inventory is the inventory at the end of the period.
Thus, the Cost of Goods Purchased is a critical component in determining the cost of inventory sold during the period, which in turn affects gross profit and net income.
Example of Cost of Goods Purchased
Let’s consider a hypothetical example:
Let’s say we have a retail business, Bookstore ABC. At the start of the year, Bookstore ABC has $5,000 worth of books in its inventory (Beginning Inventory).
During the year, Bookstore ABC purchases another $20,000 worth of books (Cost of Goods Purchased).
At the end of the year, Bookstore ABC takes inventory again and finds it has $7,000 worth of books remaining (Ending Inventory).
We can calculate the Cost of Goods Sold (COGS) for the year as follows:
COGS = Beginning Inventory + Cost of Goods Purchased – Ending Inventory
COGS = $5,000 (Beginning Inventory) + $20,000 (Cost of Goods Purchased) – $7,000 (Ending Inventory)
COGS = $18,000
So, Bookstore ABC sold $18,000 worth of books during the year. The Cost of Goods Purchased, $20,000, is a critical component of this calculation. It represents the new inventory that the bookstore bought during the year to replenish its stocks and continue selling.
