For some people who work in accounting, Cost of Goods Sold (COGS) is not a foreign term. However, for some people, it turns out that there are people who are confused with the basic understanding on how to calculate the cost of goods sold. Often time there are those who consider COGS is the same as the selling price.
Cost of Goods Sold (COGS) and selling price are two different things in terms of their meaning, function, and how to calculate them.
The following will reveal an explanation of COGS and selling prices and the differences between the two:
What Is Cost of Goods Sold (COGS)
COGS or some people call it the cost of good sold is the total direct costs incurred by a company to obtain goods or services sold to consumers. In calculating COGS, the costs that are taken into account include the cost of raw materials, direct labor costs, and overhead costs.
COGS is calculated with the aim of knowing the amount of costs incurred in the production of goods and services of a company. COGS is one of the components in the income statement.
In simple terms, COGS can be calculated in the following way:
Cost of Goods Sold (COGS)= Beginning Inventory + Net Purchases – Ending Inventory
Cost of Goods Sold (COGS) = Price Available for Sale – Ending Inventory
Meanwhile, net purchases can be calculated by:
Net Purchase = (Freight Cost + Purchase) – (Purchase Return + Purchase Discount)
Examples of Problems related to HP:
XYZZ, LLC carried out a project on November 24, 2019 with merchandise inventory (initial) of $. 200,000, Purchase of $. 500,000, Purchase of freight of $. 10,000.00, Purchase return of $. 50,000, Purchase discount of $.20,000 and ending merchandise inventory of $.100,000.
From the example above, COGS of XYZZ, LLC can be calculated like the following:
Determining Net Purchase
Net Purchase = (Transportation Cost + Purchase) – (Purchase Return + Purchase Discount) = ($. 10,000 + $. 500,000) – ($. 50,000 + $.20,000) = $ 204,000.
Determining Cost of Goods Sold (COGS)
Cost of Goods Sold (COGS) = Beginning Inventory + Net Purchases – Ending Inventory = $. 200,000 + $ 204,000 –$100,000 = $. 304,000
So the cost of goods sold is $. 304,000
The selling price is the price charged to consumers. To calculate the selling price simply can be done in the following way:
Selling Price = Production Cost + Non-Production Cost + Expected Profit
Difference between COGS and Selling Price
From the discussion above, it can be seen that the difference between COGS and Selling Price is that COGS includes all costs required for the production of goods while the selling price is the price charged to consumers for using the goods or services offered.
Calculating cellphones and selling prices is not a simple matter, because a company that has developed will input a lot of data that is not small and takes a long time.
Therefore, if you want it to be more practical and easier to determine the company’s COGS and Selling Price, you can use the help of accounting software. Not only by counting, but how technology helps to keep the books neat and orderly. Usually the accounting software offers you a 30 Days Free to use by registering your business account there.