Definition of Cost Of Goods Sold With Example

Cost Of Goods Sold

This is simply the cost that is incurred before each item of goods is sold to customers.  This is the sum of the cost of the all the raw materials that are used in producing the goods together with the direct labor costs used to generate the goods. It does not include indirect expenses for instance distribution costs and sales force costs. Cost of goods sold is showed on the income statement and it is subtracted from revenue to compute an organization's gross profit in a particular time period. This is also referred as "cost of sales".

Importance of Cost of Goods Sold

It is important to calculate cost of goods sold mainly for finding gross profit/margin in a particular time period. Gross margin is found by deducting cost of goods sold from total sales. We can’t go further without calculating gross margin as it is necessary to find out operating profit of that firm.

Example: Suppose, Northern Corporation (a fictitious company) has a cost of goods sold of $1332687 in the year 2011 and $1094635 in the year 2010. So, the value has increased over time as per the growth of the firm.