Cost Of Goods Sold (COGS) explained
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- čas přidán 12. 07. 2024
- Cost Of Goods Sold, or COGS. This video explains Cost Of Goods Sold in an easy to understand way. We will start off with some examples of Cost Of Goods Sold from the real world, discuss how COGS relates to gross profit and inventory, review the #COGS formula, and calculate Cost Of Goods Sold using both the FIFO and the LIFO methods.
If you are looking for powerful #inventory software that’s easy to use, and provides you visibility to your COGS and margins, then try InFlow inventory management software for free: partnerstack.inflowinventory....
⏱️TIMESTAMPS⏱️
00:00 Introduction to COGS
00:25 COGS in the income statement
00:48 COGS example: Apple
01:35 Cost of revenue example: Facebook
01:55 COGS example: JNJ
02:20 COGS example: Walmart
03:05 Inventory, Cost Of Goods Sold and Gross Profit
04:21 Matching revenue and COGS
05:04 Cost Of Goods Sold journal entries
06:14 Cost of Goods Sold formula
06:39 Calculating COGS using FIFO and LIFO
09:57 COGS formula FIFO vs LIFO inventory methods
We can put the Cost Of Goods Sold formula side by side for FIFO and LIFO. Beginning inventory of $2400, plus purchases of zero, minus FIFO ending inventory of $2150, equals Cost of Goods Sold of $250. Beginning inventory of $2400, plus purchases of zero, minus LIFO ending inventory of $2050, equals Cost of Goods Sold of $350. The higher the ending inventory value, the lower the Cost Of Goods Sold. The lower the Cost Of Goods Sold, the higher the (taxable) profit. The lower the ending inventory value, the higher the Cost Of Goods Sold. The higher the Cost Of Goods Sold, the lower the (taxable) profit.
Cost Of Goods Sold, Gross Profit, and inventory. Remember to always take the same number of units into COGS as the number of units you have in revenue.
Suggestion for a related video to watch: what is gross profit • What is gross profit
Philip de Vroe (The Finance Storyteller) aims to make strategy, finance and #accounting enjoyable and easier to understand. Learn the business and accounting vocabulary to join the conversation with your CEO at your company. Understand how financial statements work in order to make better investing decisions. Philip delivers financetraining in various formats: CZcams videos, classroom sessions, webinars, and business simulations. Connect with me through Linked In!
If you are looking for powerful inventory software that’s easy to use, and provides you visibility to your COGS and margins, then try InFlow inventory management software for free: partnerstack.inflowinventory.com/COGS
You're the man! Thank you for everything you do, brother.
My pleasure! 😎 Take a look at my recent video on Gross Margin as well, closely related to COGS (obviously): czcams.com/video/HknuuBkwYgg/video.html
I love the way you explain. Thank you so much from Spain!
Nice to hear that, Ricardo!!! Greetings back from the Netherlands. Send some of your warm weather our way! ;-)
Great idea to have quiz in the video!
Thank you! I agree! Two quiz questions in one video, something I have never done before. Did you get them right?
Thank you so much! very clearly explained!
You're welcome, Hana! Nice to hear that.
The Finance Storyteller p
Im so happy this video exists. I can now pass my exams!
Wishing you lots of success!!!! The related videos on gross profit czcams.com/video/HknuuBkwYgg/video.html and how to read an income statement czcams.com/video/Hq-44PHgAiU/video.html could be helpful for you too. P.S. Please spread the word to fellow students! ;-)
The best COGS video
Thank you very much!!!! 🙂
Thank you for your video. Is there a 'right' method to use in terms of calculating COGS using the FIFO vs LIFO? Does this depend on the type of business, industry etc...?
Hi Naz! No, there is no "right" method in my opinion, there are arguments pro and con for each. Most important is that companies disclose which method they use, and stay consistent over the years. US GAAP allows FIFO, LIFO or weighted-average cost, while IFRS allows only FIFO or weighted-average cost: czcams.com/video/7B96MhOGaqE/video.html Here's the link to my playlist on FIFO and LIFO calculations: czcams.com/video/RAj94EUmm6g/video.html
I can't believe I finally get this!!!
Great to hear that! Congratulations! 😊 Have a look at the related video on Gross Profit as well, it has some more examples: czcams.com/video/HknuuBkwYgg/video.html
Hi, your videos are very useful, do you have any videos to make journal entries easier?
Hello Anjali! I have a playlist with topics like the accounting equation, debits and credits, double entry accounting, accruals, etcetera, which hopefully is helpful for you: czcams.com/video/OYql7Y9NnBg/video.html
Love from Bangladesh 🇧🇩❤💕
Greetings back from the Netherlands, Nafis! Thank you for watching and commenting.
Yes I got it.
Very good! :-)
You are awesome. Thanks!
Thank you! 😊 I have many related videos on various parts of the income statement as well as the other financial statements that could be helpful for you. On the homepage of the channel, they are organized in playlists by financial statement:
Income statement playlist czcams.com/video/N6ZgIVAQeXQ/video.html
Balance sheet playlist czcams.com/video/5bWodpqRSYU/video.html
Cash flow statement playlist czcams.com/video/mZBjsIYrLvM/video.html
@@TheFinanceStoryteller Thank you for these awesome videos. I have already checked many of them. :)
@@cgmaamitjoshi9372 Thank you! Nice to hear that. Please spread the word to friends and colleagues!!!
Hi! I have a question:) if I already have the retail price and the IMU% how do I determine the cost?
Hi Kaylin! I had to look up what IMU means, as I had not heard of that before. I think my video on margin vs markup should be able to help you: czcams.com/video/rD-l7kO4-F4/video.html
If you hypothetically were able to obtain inventory at no charge how would you value that specific inventory or determine its cost of good sold when you sold it? For example if I opened a jewelry business and decided to sell a few rings that I already owned from my house how do I value this inventory if I never purchased these pieces of jewelry and if I sold it would the cost of good sold be considered zero?
Inventory is valued at the lower of cost or market. So if you obtain it at zero, you keep it in the books at an inventory value of zero. If you manage to sell it, you would indeed have a cost of goods sold of zero, and a gross margin of 100%. Due to the prudence/conservatism principle, you cannot record a gain on the inventory unless you realize the gain by selling it.
@@TheFinanceStoryteller couldn't the business purchase it from yourself first like you would a from a customer...in this particular situation? Also the personal item bought before the business was formed did or might have had an actual cost..so could you than deduct that cost and do you have to.have proof from something like that decades back??
Yes, a business (legal entity) can buy something from the owner (the person). Especially for tax purposes you will have to document that this is a transaction based on realistic pricing, i.e. similar to what you would have paid to any other person. The arm's length principle is the condition or the fact that the parties of a transaction are independent and on an equal footing.
@@TheFinanceStoryteller legal entity? ...please define what that means...
@@madmax8620 LLC, Inc, LTD, GmbH, SRL, etc. depending on the country you're in.
A brilliant explanation. Many thanks!
Could I ask please, how would you work out the COGS where you buy something as a set and then split the parts out? I don't mean bulk buying of the same item, but rather if, for example, you bought something like Lego sets. Each set is a sealed box with its own price, and you then "part out" the set into many different types of piece. Each type of piece can sell for vastly differing prices.
If you just divided the cost of the sealed box into the number of parts to give each part an equal cost (say, a £100 set with 200 parts meaning the COGS for each part you sell would be 50p) , you could be at a disadvantage when trying to claim COGS if you only sold the rarer parts that fetch high prices because your margin would be higher on those parts. But is that how it should be done?
Another example would be a breaker's yard where they buy in scrap cars and then sell the parts off for different amounts. What would the COGS be for each part they sold? A wheel would sell for a lot more than a wing mirror, so what are their costs out of the original cost of buying in the scrap car?
And yet another example could be a collection of trading cards bought for a single cost. The collection is then split into separate items to be sold, but how should we work out the COGS for each card sold?
Thanks for any tips!
Echt heel erg bedankt! (sounds like a Dutch accent on your videos, but I might be wrong). :-)
Hi John! Yes, I am indeed Dutch. I would propose to keep things as simple as possible, and realize that finance and accounting is as much an art as it is a science. My favorite example in your list above is the one about the breaker's yard. Based on years of experience, the guy running it probably knows what is likely to be the "fast moving inventory", the "slow moving inventory" and the "non moving inventory". Based on rules of thumb, you could assign 80% of what you paid for the scrap car to the fast moving inventory items that you take from it, and 20% to the slow moving inventory, and nothing for the non moving inventory. If he does end up selling a part out of the non moving inventory, he makes 100% margin on it as the part was in the books at a price of zero. The worst thing that could happen is to have value assigned to inventory that never ever moves, and subsequently has to be written off! In short: I would be more worried about overvaluing inventory than about overstating COGS.
@@TheFinanceStoryteller Thank you very much for the explanation! That's extremely helpful.
@@jonkirk2118 Graag gedaan! ;-) If you are interested in the relationship between inventory and COGS, then my video on FIFO vs LIFO inventory valuations might also be useful: czcams.com/video/VickgxlajOM/video.html as well as (more in general) my video on inventory management: czcams.com/video/DZhHSR4_9B4/video.html
@@TheFinanceStoryteller in your example here...you divided it out at 80/20/0 %...could it be any amounts? Say you bought the car only to sell the transmission and only paid for that value...and weren't sure if or when the other parts might sell as you only needed mostly the transmission...so then could you adjust the numbers to say 99% (trans.)/1%anything else that might sell...or just 100% for the trans and zero for the rest of the car?? Sooooo confusing and hard to explain if audited.
Yes, I agree, accounting and valuation are as much an art as they are a science. ;-) Some of the core principles of accounting are conservatism, consistency, and materiality. Besides that, it is advisable to keep your inventory accounting as simple as possible to avoid errors. You don't want to "undervalue" your inventory, but certainly don't want to overvalue! 100/0 vs 99/1 doesn't make much of a difference ("immaterial"). I still like my 80/20/0 proposal now that I read my earlier comment again. You can't just take any amounts, you want to back it up with some solid historical or industry data, if possible.
Thank for the great video . can you make a video of petty cash
Thank you for the kind words! I will put "petty cash" as a potential topic on my list of ideas, not sure yet what I could tell about the topic above and beyond what's already in textbooks and videos by others on CZcams...
What is beginning inventory, ending inventory & purchases? Is this raw material inventory or finished goods inventory? Are purchases the credit taken from creditors raw materials?
Beginning inventory = value of the inventory on the balance sheet at the start of the period.
Ending inventory = value of the inventory on the balance sheet at the end of the period.
Purchases = inventory bought from suppliers during the period.
Inventory can consist of raw material, work in progress, or finished goods. In the examples in the second half of this video, the fictitious companies trade (buy and sell) finished goods. They do not manufacture anything themselves (if they would, they would convert raw materials into finished goods, and perform the related accounting for it).
I think it might be advisable for you to watch some basics of accounting videos first, like this one on the relationship between income statement and balance sheet: czcams.com/video/wZdaVEX41WQ/video.html
I have a question, what if a company doesnot mention its COGS and instead mentions three other variables namely, Cost of Material Consumed; Purchase of Stock-in-Trade and Changes in inventories of finished goods, Stock-on-Trade,work-in-progress and intermidiate.
How can we calculate COGS from these three variables? Thankyou!
I would guess the best approximation of COGS is to add up those three lines.
someone help!. How did he get $6.14 for FIFO ending Inventory and $5.86 LIFO ending.?
Hi Raul! Those are weighted averages of the numbers above it. $2150 inventory value divided by 350 units is $6.14 and $2050 divided by 350 units is $5.86. For a full discussion of the differences between FIFO and LIFO accounting, see czcams.com/video/VickgxlajOM/video.html
Thank you sir, permission to use your video for my lesson...
Hello Rudyna! Please do! I am honored. 🙂 My recent follow-up video on Gross Profit could be useful for your students as well: czcams.com/video/HknuuBkwYgg/video.html
love from india
Greetings back from the Netherlands!!!
I got an exam tomorrow thank u so much I was so afraid to fail it
Happy to help! Hope the exam went well.
Does inventory depreciate? Or does it make sense to try to track that?
Hi! No, normally inventory does not depreciate. It is valued at the lower of cost (what is was bought/made for) or market price. There could be an inventory impairment though, when you write down all or part of the value, see my video on asset impairment: czcams.com/video/lWMDdtHF4ZU/video.html
@@TheFinanceStoryteller Good to know. Thank you.
@@TheFinanceStoryteller hi again!.. so when doing the inventory. .can I consider cost on some item AND also the lower market value on some other items???...or does it always have to be only one way or the other with everything inventoried. Example; i choose to count bananas at market and apples at cost..
@@madmax8620 Hello! You don't really choose, but account based on the facts of the situation in front of you. In the same accounting period, some items might have to be valued at cost (good quality apples that you are able to sell at a profit), while others may have to be valued at market price (bananas going brown for which no customer will pay the full price that you were hoping for, but you are likely to sell these at a loss versus the purchase price).
@@TheFinanceStoryteller strange...that it still sounds like a logical CHOICE that best suits each product and or situation. ..choosing which ever is less and rotten bananas at less then what was paid at cost...not sure how this is also not a choice if 2 options unless im missing something else...sounds like another common IRS trap...
How to find out cost of goods sold by using sales, stock and profit before tax
Check out the video in my FIFO LIFO COGS series, and you will understand! czcams.com/video/RAj94EUmm6g/video.html
Do you have any videos regarding tracking trade spend? For example... J&J sells their products to Walmart.
J&J needs a workbook to track all their customers monthly /period warehouse sales (cases sold) minus all the trade spend deals such as billbacks, co-ops, o&a, and any additional programs.
The spreadsheet has combined actualized sales plus sales forecast (for the periods not yet actualized)... And same with the trade spend. Also the sales and debits (trade spend) are not only tallied at top line but also broken down by category as well.
Example:
Customer > Category > Case Cost + Actualized Sales & Forecast (Cases, Net & Gross) > Coop > O&A > Billbacks ... Then a top line tally to sum up all the categories (one tally for sales, one for cases, co-op, O&A, Billbacks, etc.)
Sorry, can't help you there. I have some very simple Excel files for small business to track sales czcams.com/video/JoLPyO6Jza0/video.html and inventory czcams.com/video/Mi0H1-9gYN4/video.html , but nothing more complicated than that.
Is sales tax included in cost of goods sold?
No, sales tax is one of the items between gross sales and net sales. The income statement starts with net sales.
Hi brother
Good ....
Thank you, Vikash!
I am confused b/w two inventory formulas:- first one is cost of Material consumed & second one is COGS. Both of the formulas appears same to me , they are somewhat like "beginning inventory + purchases - ending inventory" . Please help me to differentiate between the two.
In order to make a physical product, you need materials, factory labor, electricity, etc. COGS includes all of these, material consumed only the 1st element...
@@TheFinanceStoryteller FB has labor though right?! ohhh i see.. not for COGS!
Is it normal that may COGS is higher than my sales, that makes it loss.?
Correct. If COGS is higher than sales, then the company makes a loss. That is not desirable, nor common though...
@@TheFinanceStoryteller Yes sir . and the way I calculate it is Purchases less Sales is the Ending Inventory, so Then beginning Inventory plus Purchases less Ending Inventory is equals to COGS, and so i come with Higher COGS, is it correct? or do I miss something
@@Min_Maeda There are always a few things to check. 1) Did you take the same number of units in COGS as in revenue? 2) When you do inventory accounting, did you make sure everything is accounted for at cost, not at the sales value?
@@TheFinanceStoryteller no sir. I'll do it next time I prepare thank you for your help sir
Facebook, in fact, sells its own goods.
Thanks for sharing that, I will have a look at their annual report as soon as it comes out.
Great information on all the videos but voice over videos is not clear can you make it clear and little loud for next videos
Thank you for the feedback. Switching on subtitles might be helpful as well (for the older videos).
Facebook does sell hardware in VR and it’s portal
Ah! Thanks for sharing that, Adam! I was not aware of that. Any idea how much revenue they generate from that? In finance and accounting terms: is it a material or an immaterial amount? ;-)
5:40 If cost of goods sold is an asset we are loosing why is it being debited and not credited?
Hi Tyler! Cost of goods sold is an expense, not an asset. COGS is in the income statement, not on the balance sheet. If you debit an expense it becomes bigger.
@@TheFinanceStoryteller this was such a great explanation; thank you!
welcome
Can you help me solve a question on this topic?
Sure. Go ahead.
You try to give the video more brightness it will be great if you do
Hi! Not sure what you mean by "brightness"?
0:56
But I didn't find any such thing as cost of sales or COGS in the income statement. The income statement of the company of the company about which I am talking about Looks something like this:-
TOTAL INCOME = 6726
EXPENSES
(a) cost of material consumed = 3435
(b) purchase of stock in trade = 671
(c) Change in inventory of WIP, Finished goods & Stock In trade = -327
(d) Employee benefit expense = 412
(e) FINANCE cost = 29
(f) depreciation & amortization expense = 213
(g) Other expenses = 1143
TOTAL EXPENSES = 5576
I also tried looking for COGS in the notes to financial statements in the annual report but I found nothing.
I may have used the following formula for COGS, which is = Beginning raw material inventory + Beginning WIP + Beginning finished good inventory + Total Raw material purchases + Direct labor cost + Manufacturing Overheads - ending raw material inventory - Ending WIP - Ending Finished goods Inventory.
But the problem is, Direct Labor costs & Manufacturing overhead costs are also not given in notes to Financials.
That's an often heard frustration from people analyzing financial statements... lack of synchronization of terminology between companies and countries. I would say the closest you would get to COGS is to sum a, b and c.
@@TheFinanceStoryteller Thank you
Given the average inventory is $25000 and credit sales is $125000, calculate average inventory turnover days for a 360 days year. Write the formula you would use and show calculation workings. Please solve this
I am not going to solve your homework problems for you. What I can say is that the formula for this is very similar to the one used for Days Sales Outstanding: czcams.com/video/duN0BAY9Q8s/video.html
i bet this guy is dutch :D
Correct!
@@TheFinanceStoryteller i´ve lived 10yrs in holland (2000-2010 r´dam) .. your accent is unmistakable :D
im planning to go back there ..... i buy, grow and sell companys (mergers & acquisitions) .. mostly distressed companys.. but not always..
i could use help from a trustfull financial advisor for my financial due diligence ..
Let's get in touch! My contact details are in the "About" tab of my channel, and/or let's connect on Linked In.
Yia sou