This is the cost being incurred by the organization for the purpose of creation of the products being sold by the organization. These are the costs which are being considered to be the costs which are being considered to be directly tied up with the production of the products. Indirect costs are not being included in the cost of the products. COGS of an organization which is selling bicycle would be the cost being incurred by it towards manufacturing of bicycle. There are various ways which are being used for the purpose of calculation of COGS. The calculation is being used for the purpose of making sure that, cost of goods sold are being used by the organization for ensuring that, best results are being generated by it.
Example of the cost of goods sold
If the cost being incurred towards acquisition of toy truck in a store is $40 and shipping cost is $10 then, the cost of goods sold in the course of toy truck would be at the level of $50 which would be the cost being incurred for the purpose of acquiring the product along with the direct cost being incurred towards the product. Therefore, the formula for cost of goods sold would be
It is crucial for the organization to ensure that it is finding out the exact value of the cost of capital in the area of doing the working. This particular thing is going to help the organization to make sure that, proper results are being generated in the area of doing the tasks being carried out by the organization. The accounting method being used by the organization in the course of identification of cost of capital would be the one which would impact balance sheet, income statement, and statement of cash flows of the organization at a particular point of time.
Types of Inventory Costing Methods
There are certain methods which are being used by the organization for the purpose of ensuring that, cost of capital is being identified by it in the area of doing the tasks being taken into consideration.
a. First in First out Method: This method makes the assumption of the fact that the inventory which comes in first would be left at the beginning.
b. Last in first out: This method shows that the inventory which has come in at the last point would be taken into consideration at the first point.
c. Average cost: In this particular method, the weighted average of all the units would be taken into consideration and then, the value of inventory would be identified on the basis of the weighted average cost of the products being taken into consideration by the organization.
Importance of Inventory Valuation
All the three methods of inventory valuation i.e. FIFO, LIFO and weighted average cost method provide different results in the course of valuation of inventory of the organization. This occurs as a result of the fluctuation in the price. In case, there is no inflation and the prices remain the same then, all the methods are going to provide the same results to the management. Over the long period of time, the prices of the products are likely to undergo changes and as a result of the changes, it is being identified that the organization would be required to make sure that, valuation is being carried out in a proper and appropriate way for doing the tasks.
If there is a rise in the prices then, each of the accounting methods will produce the following results:
a. FIFO would give a better indication of the value of ending inventory but it would also result in increasing the net income as several years old inventory and it is being used as the value of the cost of goods sold. This will have an increase in the net income for sure but it is also going to have increased in the taxes being paid by it.
b. The LIFO method is a good indicator of closing inventory as the leftover inventory would be considered to be the inventory which is going to be extremely old and obsolete. LIFO would result in lowering the net income and cost of goods sold would be at a higher level.
c. The average cost would have production of results which would be somewhere between LIFO and FIFO method.
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