![]() ![]() ![]() When Company XYZ sells a pair of eyeglasses in April, which cost does Company XYZ use: $10, $9, or $11? Company XYZ's choice of inventory valuation methods (which generally include the last in, first out ( LIFO), first in, first out (FIFO), and weighted-average methods) dramatically affects COGS (and by extension, profit) it lists on the income statement.Ĭompany XYZ's choice of which inventory units to sell first affects the value of its remaining inventory and its total cost of goods sold for the 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.įor example, let's assume Company XYZ purchased 100 plastic frames in January for $10 each, 50 frames in February for $9 each, and 200 frames in March for $11 each. 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. Let's assume Company XYZ incurs the following costs to produce one pair of eyeglasses:īy adding these direct expenses, we can calculate that it costs Company XYZ $17 to make one pair of eyeglasses. But cost of goods sold does not include indirect expenses, such as utilities, office supplies, or items not associated with the production of a specific good or service. How Does Cost of Goods Sold (COGS) Work?įor goods, COGS is primarily composed of the cost of the raw materials that physically constitute the item. Cost of goods sold (COGS) is an accounting term to describe the direct expenses related to producing a good or service. ![]()
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