Definition of Cost of goods sold

Cost of goods sold

The cost of merchandise that a company sold this year. For manufacturing companies, the cost of raw
materials, components, labor and other things that went into producing an item.

Cost of goods sold

See cost of sales.

Cost of goods sold

The cost of the items that were sold during the current period.

Cost of goods sold

The accumulated total of all costs used to create a product or service,
which is then sold. These costs fall into the general sub-categories of direct
labor, materials, and overhead.

Cost of goods sold

The charge to expense of the direct materials, direct labor, and
allocated overhead costs associated with products sold during a defined accounting
period.

Earnings before interest and taxes (EBIT)

A financial measure defined as revenues less cost of goods sold
and selling, general, and administrative expenses. In other words, operating and non-operating profit before
the deduction of interest and income taxes.

First-In-First-Out (FIFO)

A method of valuing the cost of goods sold that uses the cost of the oldest item in
inventory first.

Gross profit margin

Gross profit divided by sales, which is equal to each sales dollar left over after paying
for the cost of goods sold.

INCOME STATEMENT

An accounting statement that summarizes information about a company in the following format:
Net Sales
– cost of goods sold
--------------------
Gross profit
– Operating expenses
--------------------
Earnings before income tax
– Income tax
--------------------
= Net income or (Net loss)
Formally called a “consolidated earnings statement,” it covers a period of time such as a quarter or a year.

INVENTORY TURNOVER

The number of times a company sold out and replaced its average stock of goods in a year. The formula is:
(cost of goods sold) / (Average inventory (beginning inventory + ending)/2 )

NET INCOME

The profit a company makes after cost of goods sold, expenses, and taxes are subtracted from net sales.

PROFIT

What’s left over after you subtract the cost of goods sold and all your expenses from sales.

Gross profit

The result of subtracting cost of goods sold from sales. Synonymous with gross margin.

gross margin, or gross profit

This first-line measure of profit
equals sales revenue less cost of goods sold. This is profit before operating
expenses and interest and income tax expenses are deducted. Financial
reporting standards require that gross margin be reported in
external income statements. Gross margin is a key variable in management
profit reports for decision making and control. Gross margin
doesn’t apply to service businesses that don’t sell products.

functional classification

a separation of costs into groups based on the similar reason for their incurrence; it includes
cost of goods sold and detailed selling and administrative
expenses

net realizable value approach

a method of accounting for by-products or scrap that requires that the net realizable value of these products be treated as a reduction in the cost of the primary products; primary product cost may be reduced by decreasing either
(1) cost of goods sold when the joint products are sold or
(2) the joint process cost allocated to the joint products

product contribution margin

the difference between selling price and variable cost of goods sold

standard cost system

a valuation method that uses predetermined
norms for direct material, direct labor, and overhead
to assign costs to the various inventory accounts and
cost of goods sold

Depletion

The reduction in a natural resource, which equates to the cost of goods sold
in a manufacturing organization.

Gross margin

Revenues less the cost of goods sold.

Perpetual inventory

A system that continually tracks all additions to and deletions
from inventory, resulting in more accurate inventory records and a running total for
the cost of goods sold in each period.

Proration

The allocation of either under- or over-allocated overhead costs among the
work-in-process, finished goods, and cost of goods sold accounts at the end of an
accounting period.

Accounts Payable Days (A/P Days)

The number of days it would take to pay the ending balance
in accounts payable at the average rate of cost of goods sold per day. Calculated by dividing
accounts payable by cost of goods sold per day, which is cost of goods sold divided by 365.

Average-Cost Inventory Method

The inventory cost-flow assumption that assigns the average
cost of beginning inventory and inventory purchases during a period to cost of goods sold and
ending inventory.

First-In, First-Out (FIFO) Inventory Method

The inventory cost-flow assumption that
assigns the earliest inventory acquisition costs to cost of goods sold. The most recent inventory
acquisition costs are assumed to remain in ending inventory.

Gross Profit

Revenue less cost of goods sold.

Inventory Days

The number of days it would take to sell the ending balance in inventory at the
average rate of cost of goods sold per day. Calculated by dividing inventory by cost of goods sold
per day, which is cost of goods sold divided by 365.

Last-In, First-Out (LIFO) Inventory Method

The inventory cost-flow assumption that assigns the most recent inventory acquisition costs to cost of goods sold. The earliest inventory
acquisition costs are assumed to remain in ending inventory.

Accelerated cost recovery system (ACRS)

Schedule of depreciation rates allowed for tax purposes.

Agency cost view

The argument that specifies that the various agency costs create a complex environment in
which total agency costs are at a minimum with some, but less than 100%, debt financing.

Agency costs

The incremental costs of having an agent make decisions for a principal.

All-in cost

Total costs, explicit and implicit.

Average cost of capital

A firm's required payout to the bondholders and to the stockholders expressed as a
percentage of capital contributed to the firm. Average cost of capital is computed by dividing the total
required cost of capital by the total amount of contributed capital.

Bankruptcy cost view

The argument that expected indirect and direct bankruptcy costs offset the other
benefits from leverage so that the optimal amount of leverage is less than 100% debt finaning.

Carring costs

costs that increase with increases in the level of investment in current assets.

Cost company arrangement

Arrangement whereby the shareholders of a project receive output free of
charge but agree to pay all operating and financing charges of the project.

Cost of capital

The required return for a capital budgeting project.

Cost of carry

Related: Net financing cost

Cost of funds

Interest rate associated with borrowing money.

Cost of lease financing

A lease's internal rate of return.

Cost of limited partner capital

The discount rate that equates the after-tax inflows with outflows for capital
raised from limited partners.

Cost-benefit ratio

The net present value of an investment divided by the investment's initial cost. Also called
the profitability index.

Equivalent annual cost

The equivalent cost per year of owning an asset over its entire life.

Execution costs

The difference between the execution price of a security and the price that would have
existed in the absence of a trade, which can be further divided into market impact costs and market timing
costs.

Financial distress costs

Legal and administrative costs of liquidation or reorganization. Also includes
implied costs associated with impaired ability to do business (indirect costs).

Fixed cost

A cost that is fixed in total for a given period of time and for given production levels.

Friction costs

costs, both implied and direct, associated with a transaction. Such costs include time, effort,
money, and associated tax effects of gathering information and making a transaction.

Incremental costs and benefits

costs and benefits that would occur if a particular course of action were
taken compared to those that would occur if that course of action were not taken.

Information costs

Transaction costs that include the assessment of the investment merits of a financial asset.
Related: search costs.

Market impact costs

Also called price impact costs, the result of a bid/ask spread and a dealer's price concession.

Market timing costs

costs that arise from price movement of the stock during the time of the transaction
which is attributed to other activity in the stock.

Net financing cost

Also called the cost of carry or, simply, carry, the difference between the cost of financing
the purchase of an asset and the asset's cash yield. Positive carry means that the yield earned is greater than
the financing cost; negative carry means that the financing cost exceeds the yield earned.

Opportunity cost of capital

Expected return that is foregone by investing in a project rather than in
comparable financial securities.

Opportunity costs

The difference in the performance of an actual investment and a desired investment
adjusted for fixed costs and execution costs. The performance differential is a consequence of not being able
to implement all desired trades. Most valuable alternative that is given up.

Overbought/oversold indicator

An indicator that attempts to define when prices have moved too far and too
fast in either direction and thus are vulnerable to reaction.

Presold issue An issue

that is sold out before the coupon announcement.

Price impact costs

Related: market impact costs

Replacement cost

cost to replace a firm's assets.

Round-trip transactions costs

costs of completing a transaction, including commissions, market impact
costs, and taxes.

Search costs

costs associated with locating a counterparty to a trade, including explicit costs (such as
advertising) and implicit costs (such as the value of time). Related:information costs.

Shortage cost

costs that fall with increases in the level of investment in current assets.

Sunk costs

costs that have been incurred and cannot be reversed.

Trading costs

costs of buying and selling marketable securities and borrowing. Trading costs include
commissions, slippage, and the bid/ask spread. See: transaction costs.

Transactions costs

The time, effort, and money necessary, including such things as commission fees and the
cost of physically moving the asset from seller to buyer. Related: Round-trip transaction costs, Information
costs, search costs.

True interest cost

For a security such as commercial paper that is sold on a discount basis, the coupon rate
required to provide an identical return assuming a coupon-bearing instrument of like maturity that pays
interest in arrears.

Variable cost

A cost that is directly proportional to the volume of output produced. When production is zero,
the variable cost is equal to zero.

Weighted average cost of capital

Expected return on a portfolio of all the firm's securities. Used as a hurdle
rate for capital investment.

Cost basis

An asset’s purchase price, plus costs associated with the purchase, like installation fees, taxes, etc.

MACRS (Modified Accelerated Cost Recovery System)

A depreciation method created by the IRS under the Tax Reform Act of 1986. Companies must use it to depreciate all plant and equipment assets installed after December 31, 1986 (for tax purposes).

Absorption costing

A method of costing in which all fixed and variable production costs are charged to products or services using an allocation base.

Activity-based costing

A method of costing that uses cost pools to accumulate the cost of significant business activities and then assigns the costs from the cost pools to products or services based on cost drivers.

Avoidable costs

costs that are identifiable with and able to be influenced by decisions made at the business
unit (e.g. division) level.

Cash cost

The amount of cash expended.

Cost

A resource sacrificed or forgone to achieve a specific objective (Horngren et al.), defined
typically in monetary terms.

Cost behaviour

The idea that fixed costs and variable costs react differently to changes in the volume of
products/services produced.

Cost centre

A division or unit of an organization that is responsible for controlling costs.

Cost control

The process of either reducing costs while maintaining the same level of productivity or maintaining costs while increasing productivity.

Cost driver

The most significant cause of the cost of an activity, a measure of the demand for an activity
by each product/service enabling the cost of activities to be assigned from cost pools to products/services.

Cost object

Anything for which a measurement of cost is required – inputs, processes, outputs or responsibility centres.

Cost of capital

The costs incurred by an organization to fund all its investments, comprising the risk-adjusted
cost of equity and debt weighted by the mix of equity and debt.

Cost of manufacture

The cost of goods manufactured for subsequent sale.

Cost of quality

The difference between the actual costs of production, selling and service and the costs that would be incurred if there were no failures during production or usage of products or services.

Cost of sales

The manufacture or purchase price of goods sold in a period or the cost of providing a service.

Cost-plus pricing

A method of pricing in which a mark-up is added to the total product/service cost.

Cost pool

The costs of (cross-functional) business processes, irrespective of the organizational structure of the business.

Cost–volume–profit analysis (CVP)

A method for understanding the relationship between revenue, cost and sales volume.

Direct costs

costs that are readily traceable to particular products or services.

Fixed costs

costs that do not change with increases or decreases in the volume of goods or services
produced, within the relevant range.

Full cost

The cost of a product/service that includes an allocation of all the (production and
non-production) costs of the business.

Indirect costs

costs that are necessary to produce a product/service but are not readily traceable to particular products or services – see overhead.

Job costing

A method of accounting that accumulates the costs of a product/service that is produced either
customized to meet a customer’s specification or in a batch of identical product/services.

Labour oncost

The non-salary or wage costs that follow from the payment of salaries or wages, e.g. National
Insurance and pension contributions.

Lifecycle costing

An approach to costing that estimates and accumulates the costs of a product/service over
its entire lifecycle, i.e. from inception to abandonment.

Marginal cost

The cost of producing one extra unit.

Opportunity cost

The lost opportunity of not doing something, which may be financial or non-financial, e.g. time.

Period costs

The costs that relate to a period of time.

Prime cost

The total of all direct costs.

Process costing

A method of costing for continuous manufacture in which costs for an accounting compared are compared with production for the same period to determine a cost per unit produced.

Product cost

The cost of goods or services produced.

Relevant cost

The cost that is relevant to a particular decision – future, incremental cash flows.

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