Cost of Goods Sold are Expenses found on the Income Statement/Statement of Financial Position. Cost of Goods Sold refers to direct costs that were incurred in the production of goods that were sold during the period. It is important to note that this does not include the cost of all goods produced -> only the proportion of goods that have been sold are included in the Cost of Goods Sold.
Costs should include only Direct Costs attributable to the production of goods:
Raw Materials used
Direct Labour costs (usually costs of operators and production plant supervisors)
Electricity and other utilities directly attributable to the production facilities
Rent on the property used for production
Depreciation on machinery and the property used for production
Costs EXCLUDED from the Cost of Goods Sold:
General Management salaries
General Administrative Salaries
Sales staff costs
Head office rent (unless the head office is the production plant)
Utilities at the head office (unless the head office is the production plant)
Anything not directly related to the production of goods
An example journal entry associated with Cost of Good Sold can be found below.
When a sale for Cash is made, we record the Cash and Revenue:
We also need to record the loss of Inventory (found on the Balance Sheet/Statement of Financial Position), which becomes an Expense (Cost of Goods Sold) for the entity.
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