Cost of Goods Sold Overview: Study Sheet
Posted by Professor Cram in Inventory
Business Math Terms
- Cost of Goods Sold is a measure of the direct cost involved in acquiring or producing goods that are, in turn, sold. The methods of measuring cost of goods sold are explained below, but a company's chosen method must be consistent with their method of measuring inventory value.
- Inventory represents finished and unfinished goods which have not yet been sold by a company.
- Inventory Valuation is a measure of the value of a comapny's unsold inventory. The methods of measuring inventory value are explained below, but a company's chosen method must be consistent with their method of measuring cost of goods sold.
Cost of Goods Sold
The value of inventory (goods) a company has sold can be calculated using one of the following methods:
Average Cost Method
- Assumes goods sold are non-unique (that is, every one is similar to every other one)
- Not generally recommended where prices are volatile
- Tends to even out price fluctuations over time
- Like with Inventory Valuation, uses the average unit cost to calculate the cost of goods sold:
Average Unit Cost = (Total Unit Cost)/(Total Quantity of Units)
Cost of Goods Sold = (Average Unit Cost) x (Number of Units Sold)
FIFO (First In, First Out) Method
- Assumes goods sold are non-unique (that is, every one is similar to every other one)
- Generally preferred cost of goods sold valuation method
- Assumes inventory is sold in the order that it is stocked, with the oldest goods sold first and the newest goods sold last
- Uses the unit cost per batch of acquired/produced goods, and counts the cost of goods forwards from the oldest batch:
Unit Cost per batch = (Cost/Quantity) for each batch
Cost of Goods Sold = (Unit Cost x Quantity) for each batch
LIFO (Last In, First Out) Method
- Assumes goods sold are non-unique (that is, every one is similar to every other one)
- Is highly regulated (or, in some cases, illegal) as a method for measuring cost of goods sold
- Assumes newest inventory is sold first, with the oldest goods sold last
- Uses the unit cost per batch of acquired/produced goods, and counts the cost of goods sold backwards from the newest batch:
Unit Cost per batch = (Cost/Quantity) for each batch
Cost of Goods Sold = (Unit Cost x Quantity) for each batch
Get More Help!
Click one of these links to get more help from another Cramlet in this same chapter:
- Inventory Value Study Sheet
- Inventory Turnover Rate at Retail
- Inventory Turnover Rate at Cost
- Inventory Value: LIFO
- Inventory Value: Average Cost Method
- Inventory Value: FIFO
- Cost of Goods Sold Overview: Study Sheet
- Cost of Goods Sold: LIFO
- Cost of Goods Sold: FIFO
- Cost of Goods Sold: Average Cost Method
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