Cost of goods sold is a variance of cost of sales commonly used in retail. Cost of goods sold is a section of the income statement or profit and loss statement. There are two prominent methods used to calculate the dollar value of cost of goods sold. These two methods are the specific identification method and the inventory adjustment method.
Service based operations do not use the traditional retail based format for the profit and loss statement which utilizes a ‘Cost of Goods Sold’ section, instead the service industry uses a ‘Cost of Services Rendered’ segment. The presentation format is very similar though.
One of the many ratios used in business, the inventory turnover rate is often misunderstood, miscalculated and misused. The traditional business course in academia explains that ideally the inventory turnover ratio (rate) is the highest number possible. This higher value means the business operation is selling the product as fast as possible. This in turn signifies that the business is getting the best return on its financial investment into inventory.
Many business owners misunderstand the use of term ‘Cost of Sales’ by restricting it to just simply ‘Cost of Goods Sold’. Basically, most business entrepreneurs and even accountants don’t realize that it has several different names and presentation formats. But it is essentially costs of sales.
Variable costs are those business related expenditures that vary in proportion to production. The most common examples of variable costs include raw materials, labor, packaging and distribution expenses related to producing and delivering the product or service.
QuickBooks does not have a seamless subroutine to transfer costs from construction in process control account to the profit in loss statement’s cost of construction section. Therefore, the accountant has to export data to a spreadsheet and then sum the respective functional costs of materials, subcontractors, labor, land etc. and then make a general journal entry to complete the transfer. This article explains this process in detail.
Almost all retail based operations require a Point of Sale (POS) System to properly record the customer and product activity. What is a Point of Sale System? How is it set up? What information should we get from this system? How does a small business owner benefit from this system?
The goal of accounting is to record the economic activity of the business. This is achieved by entering each economic transaction into a set of books. The books are formatted to reflect the balance sheet and income statement items. The chart of accounts is designed to present the information in the prescribed format.
Contribution margin is a core business concept and is often used in cost accounting to identify the amount of financial contribution a sold product provides to the company. Simply put, contribution margin is the sales price less the direct costs (sometimes referred to as variable costs).
The Internal Revenue Service defines a business expense as ‘ordinary’ and ‘necessary’. Ordinary expenses are those costs typically incurred in your industry. A restaurant would not ordinarily purchase vaccines. And a medical practice would not purchase 50 heads of lettuce.
Each industry is different in determining costs of goods sold or cost of services rendered. Retail uses two distinct methods to calculate costs of goods sold. The first is called ‘Specific Identification’ whereby each item sold is specifically identified to its recorded cost. The second method is referred to as ‘Inventory Adjustment’ format. In this method, a beginning and ending balance is recorded along with the purchases throughout the year.
