A cost of goods sold statement tracks inventory costs by starting with beginning inventory, adding purchases and expenses, subtracting ending inventory, and accounting for direct materials, labor, factory overhead, work in progress, and finished inventory. Non-manufacturing companies add inventory purchases and expenses related to selling inventory, while manufacturing companies also include direct materials, labor, and factory overhead. The statement can use the FIFO or LIFO inventory method. For a manufacturing company, the statement includes initial direct materials, purchases, returns and allowances, direct labor, factory overhead, work in progress inventory, and finished goods inventory. The final result is the cost of goods sold.
A cost of goods sold statement reflects a company’s actual inventory costs. The statement starts with the beginning inventory and adds new purchases and expenses. Ending inventory is subtracted to arrive at cost of goods sold. Manufacturing companies account for direct materials, labor, factory overhead, work in progress, and finished inventory in the expense section.
Beginning inventory is the first entry on a statement of cost of goods sold. This figure reflects the book value of a company’s existing inventory at the beginning of an accounting period. For example, if a company calculates the cost of goods sold on a quarterly basis, the beginning inventory for the fourth quarter would equal the ending inventory for the third quarter.
Businesses that do not make their own products will generally add inventory purchases. The second line of a statement of cost of goods sold reflects the amount of inventory that was purchased during the period. After purchases, non-manufacturing companies add expenses related to selling inventory. Some of those expenses could include shipping costs and trade fees.
Returns and allowances are typically subtracted from the beginning inventory value on a statement of cost of goods sold. Returns and rebates include trade and volume discounts, as well as refunds for lost or damaged merchandise. The cost of goods available for sale reflects the value of beginning inventory plus purchases, less returns, allowances, and direct expenses. For a non-manufacturing company, the last step is to subtract ending inventory to arrive at cost of goods sold.
It is important to note that a company can use the first-in, first-out (FIFO) or last-in, first-out (LIFO) inventory method. With the FIFO method, a company calculates inventory costs by assuming that the oldest products are sold before new purchases. The LIFO method assumes the opposite.
On the statement of cost of goods sold for a manufacturing company, the first line represents the value of initial direct materials. Purchases are added and returns and allowances are subtracted to arrive at materials available for use. The amount of direct materials at the end of the period is subtracted from the materials available for use to arrive at the amount of direct materials a company has used.
Direct labor and factory overhead are included on a statement for a manufacturing company. These are the costs associated with the production of the final product. Some of those costs could include depreciation on a factory, payroll taxes, and utilities. Direct materials consumed, direct labor, and factory overhead are added together to get the total cost of manufacturing.
The value of work in process inventory at the beginning of the period is added to the total cost of manufacturing. The final work in process inventory for the period is subtracted. This figure is known as the cost of manufactured goods. Finished goods inventory at the beginning of the period is added and then the value of finished goods inventory at the end of the period is subtracted to arrive at cost of goods sold.
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