Cost of Goods Sold
Module 4:
Inventory & Costing
Duration:
45-60 minutes
Level:
Beginner to Diploma-Level
Lesson Objectives
➛ Define Cost of Goods Sold
➛ Identify components of COGS
➛ Calculate COGS under a periodic inventory system
➛ Explain how COGS affects gross profit and net profit
➛ Understand the relationship between inventory and COGS
➛ Identify common COGS errors
Key Vocabulary
➛ Cost of Goods Sold
➛ Beginning Inventory
➛ Ending Inventory
➛ Purchases
➛ Freight-In
➛ Gross Profit
➛ Net Sales
What Is Cost of Goods Sold?
Cost of Goods Sold represents the direct cost of merchandise sold to customers during an accounting period.
COGS appears on the Income Statement and directly affects profitability.
Components of COGS | Periodic System
COGS includes
➛ Beginning Inventory
➛ Purchases
➛ Freight-in
➛ Less: Purchase returns and allowances
➛ Less: Purchase discounts
➛ Less: Ending Inventory
COGS Formula | Periodic Inventory System
Beginning Inventory
+ Net Purchases
− Ending Inventory
= Cost of Goods Sold
Where
Net Purchases = Purchases + Freight-In − Returns − Discounts
COGS and Profit Relationship
Change
Higher COGS
Lower COGS
Higher COGS
Lower COGS
Effect on COGS
Increase
Decrease
Increase
Decrease
Effect on Profit
Lower profit
Higher profit
Lower profit
Higher profit
Common COGS Errors
➛ Incorrect inventory counts
➛ Including damaged or obsolete goods
➛ Errors in purchase records
➛ Incorrect freight-in treatment
Identify the Component
State whether each item is Included or Excluded from COGS
➛ Beginning inventory
➛ Ending inventory
➛ Freight-in
➛ Sales returns
➛ Purchase discounts
Fill in the Blanks
1. COGS represents the cost of goods __________.
2. COGS is reported on the __________ statement.
3. Higher COGS results in __________ profit.
4. Freight-in is __________ in COGS.
COGS Calculation
A business reports
Beginning Inventory
Purchases
Freight-In
Purchase Returns
Ending Inventory
Purchases
Freight-In
Purchase Returns
Ending Inventory
= $10,000
= $40,000
= $2,000
= $3,000
= $9,000
= $40,000
= $2,000
= $3,000
= $9,000
Calculate Cost of Goods Sold.
Error Analysis
Ending inventory was overstated by $4,000.
Questions
➛ Effect on COGS?
➛ Effect on profit?
Mini Case Study
A retailer notices that profits dropped even though sales increased.
Questions
➛ How could COGS explain this situation?
➛ Name two reasons COGS might increase.
➛ How can better inventory control help manage COGS?
Quick Quiz
➛ What is Cost of Goods Sold?
➛ Where does COGS appear in the financial statements?
➛ Name two components of COGS.
➛ How does overstated ending inventory affect COGS?
➛ Why is COGS important to management?
Answers ➧ Here
Stock Count & Inventory Controls ➧ Here