Cost of Goods Sold

Cost of goods sold can be described as a direct expense that associated with the production of the goods with a production plant or a factory. Cost of goods sold of a company is listed in the income statement of the company. Cost of goods sold primarily composed of the cost of the raw materials that are used for the manufacturing of the product. However the cost of goods sold don’t include the indirect expenses such as utilities, supplies used in office and the items that are not associated with the production of the goods in the manufacturing unit of the company.

Let’s assume Company XYZ incurs the following costs to produce one pair of eyeglasses:

Item                 Cost
Plastic frame     $10
Lenses              $5
Glue                  $1
Screws              $1

By adding these direct expenses, we can calculate that it costs Company XYZ $17 to make one pair of eyeglasses. If Company XYZ’s raw materials prices never changed, it might be practical for Company XYZ to calculate total cost of goods sold by multiplying $17 by the number of eyeglasses sold in a period. However, raw materials prices frequently do change, and when Company XYZ sells a pair of eyeglasses, it must determine exactly which materials it was selling.

Cost of goods sold is important to calculate because it is the primary factor in calculating the gross profit of the company. The calculation of the gross profit is necessary as it matter to calculate every other kind of profit of the company.

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