Cost of Merchandise Sold
Cost of Merchandise Sold (COMS), also known as Cost of Goods Sold (COGS), refers to the direct costs of producing the goods sold by a company. This amount includes the cost of the materials and labor directly used to create the good. It excludes indirect expenses such as distribution costs and sales force costs.
In a retail or wholesale business, the term “Cost of Merchandise Sold” is often used instead of “Cost of Goods Sold”. The two terms mean essentially the same thing, but “Cost of Merchandise Sold” emphasizes that the company is in the business of reselling goods it has bought wholesale, rather than manufacturing goods itself.
The basic formula to calculate Cost of Merchandise Sold is:
COMS = Beginning Inventory + Purchases – Ending Inventory
Where:
- Beginning Inventory is the value of the merchandise at the start of the period (typically a fiscal year, quarter, or month).
- Purchases is the cost of additional merchandise bought during the period.
- Ending Inventory is the value of the merchandise remaining unsold at the end of the period.
The Cost of Merchandise Sold is then subtracted from Sales Revenue to calculate Gross Profit. This is a key figure in understanding a company’s profitability.
Example of Cost of Merchandise Sold
Let’s consider a hypothetical example:
Suppose we have a retail clothing business, Stylish Outfits Co. Here are the relevant figures for one fiscal year:
- Beginning Inventory: $200,000 (This is the value of the merchandise at the start of the year.)
- Purchases: $800,000 (This is the cost of additional merchandise bought during the year.)
- Ending Inventory: $150,000 (This is the value of the merchandise remaining unsold at the end of the year.)
We can use these numbers to calculate Cost of Merchandise Sold (COMS) as follows:
COMS = Beginning Inventory + Purchases – Ending Inventory
COMS = $200,000 (Beginning Inventory) + $800,000 (Purchases) – $150,000 (Ending Inventory)
COMS = $850,000
So, the Cost of Merchandise Sold for Stylish Outfits Co. during this fiscal year is $850,000. This means that it cost the company $850,000 to purchase the merchandise it sold during this year. This figure would then be used to calculate the company’s gross profit by subtracting COMS from the company’s sales revenue.
