What is cost of goods sold? How is the formula calculated? How important is cost accounting in business?… The following article, Sapo Blog will share with you the concept and methods of calculating cost of goods sold as well as ways to overcome when the cost of goods is lost. wrong.
When adding a new product to the inventory on sales management software, you will see an input box Initial cost. That is the cost of importing goods (Including the total cost: purchase + shipping + warehousing ...). This is the required data, later accounting for profit and loss, inventory value, ... the system will need to rely on this to make accurate calculations and reports.
1. What is the concept of cost of goods sold?
The first thing if you want to manage cash flow effectively, you need to understand what is the concept of cost of goods sold?
Cost of goods sold is the capital value of goods sold sold during a specific period (in a period). Cost of goods sold includes all costs associated with the creation of the product.
In investments, the easiest to see is the cost of importing goods, the budget account for a large proportion in the business stage. Therefore, it is necessary to understand what COGS is, how it is formed, how it works, and how it is calculated. Then you'll know how the store business is actually growing.
So what does cost of goods sold include?
Costs related to the cost of goods sold include all costs to create a product such as the cost of purchasing raw materials, the cost of producing goods, labor costs, administrative expenses, and other expenses. transport fee,…
For each different type of company, there will be different definitions of cost of capital:
- For trading companies (that is, importing available products for sale), the cost of goods sold is understood as the sum of all costs from the time of purchase to the time the goods arrive at the company's warehouse, including : price of goods imported from suppliers, cost of transporting goods to the warehouse, taxes, cargo insurance, etc.
- For manufacturing companies (companies that directly produce products), the costs constituting the cost of goods will be more than that of trading companies due to the additional cost of input materials to produce products.
In addition, the cost of capital of each different company also varies depending on the different provisions under the contract with the supplier.
2. Cost of capital was born for what?
The market is always fluctuating, and sellers are not always able to import goods at a stable price. Maybe you can now import a batch of 30 men's round-neck T-shirts - white for 50K/piece. Hot goods sell very easily, 2 days later you enter a lot of 50 pieces. But the goods are scarce, the supplier raises the price to 60K/piece. Let's accept the pain, anyway, hot selling goods are still profitable. The entry price keeps changing like that for the next entry.
So the problem here is how to know the amount of money you have spent importing goods (cost) when the quantity of imported goods and the cost of goods (import costs) are different at each time? On the other hand, the store is selling several hundred, even thousands of product codes, so it makes no sense to calculate on the books?
3. How to calculate cost of goods sold
Currently, there are 3 methods of calculating cost of goods sold in the world as follows:
3.1. Formula to calculate FIFO (First In, First Out)
This calculation means that first in, first out. The FIFO costing formula is only suitable for expiry items, or used electronics, computers, and phones. In the retail model, groceries are rarely used, because the calculation of the data is complicated and complicated.
3.2. Formula to calculate LIFO (Last In First Out)
The calculation method LIFO (last in, first out) is rarely used today, now only 2 countries, the US and Japan, accept this calculation. However, the International Accounting Standards Board (IASB) in the US denied it because the above calculation formula lacks accuracy.
A very obvious drawback in LIFO cost of goods sold is that inventory valuation is not reliable, in case the inventory is old product and has an outdated value at current prices.
3.3. Formula for calculating weighted average of cost of goods sold
This method of calculating cost of goods sold, called Weighted Average, is currently being used by Sapo Sales Management Software to calculate inventory value. In many other places, this formula is also called Moving Average, or Continuous Average… And this is also the most common costing method that modern software is applying today.
According to this calculation method, each time the goods are imported, the cost price will be recalculated according to the formula:
MAC = ( A + B ) / C
With:
MAC: Cost of product on instantaneous average
A: Pre-entry current inventory = Pre-entry inventory * Pre-entry MAC price
B: Value of new inventory = New inventory * cost-allocated inventory
C: Total inventory = Inventory before import + inventory after import
With this cost of goods sold method, you need to ensure that your inventory information is absolutely accurate. Because when the quantity of inventory is wrong, it will lead to both the numerator and the denominator being wrong. If the cost of goods sold is wrong, it will not be possible to calculate the correct gross profit and inventory value.
4. Causes of the wrong cost of goods sold and how to fix it
As mentioned, when the inventory quantity is wrong, it will lead to the wrong cost accounting. Usually, there are two main reasons:
- Implement the negative sales process
- Wrong supplier return process
We will analyze each cause, why it causes the cost of goods sold accounting to be incorrect, leading to incorrect inventory value and profit and loss statistics.
Implement the negative sales process
As a rule, after importing goods, you need to enter the full inventory of each product code into the sales management software, then it can be sold. If the business is wrong, the data will of course be completely wrong. Implemented wrong warehouse process, common mistakes are Negative Sales and Suppliers Returns
When the point of sale software allows negative sales (i.e. allows selling first and restocking later to offset negative inventory). This situation often happens with HOT items, the shop owner has not been able to store it in time, but has sold it on the shelf, or returned the goods to the customer at the counter. Towards the end of the session or even until the next day to enter the warehouse, or the friend forgets to enter the warehouse….
In that case, at the time of shipment, the cost of goods sold is zero or is misleading, leading to incorrect calculation of gross profit. When the cost of goods sold in the warehouse is very high, the profit and loss & sales of the store will no longer be true to reality.
Wrong supplier return process
Cost deviation error occurs when returning part of goods purchased from suppliers after selling on the rest. According to accounting principles, when returning goods to suppliers, the warehouse accountant needs to record the cost of goods sold again, but if not doing this operation, the cost price will no longer be accurate.
Sapo software will automatically re-calculate the cost of goods sold when returning goods to the supplier, considering the return value belongs to the item "Value of purchased goods returned, discounted" in the group of reduced adjustment documents when accounting for cost goods sold using the average method
Formula for calculating cost of goods sold when returning goods:
MAC = ( A – B ) / C
With:
MAC: The cost of the product is recalculated when the user clicks export returnssuppliers
A = Prepaid inventory value = Prepaid inventory * Prepaid cost price
B = Returned Purchase Value = Amount Returned * Refund for each product (taxes and surcharges not included in the returned value)
C = (Prepaid inventory – Amount paid)
See also: 9 product pricing strategies you need to know if you want a profitable business
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