Learning Business: How to Make Money with Cost of Goods Sold

 
WHAT IS COST OF GOODS SOLD?
The goal of most businesses is to generate revenue and make profits. Many businesses generate revenue and make profit from selling goods that they have bought or produced. Cost of Goods Sold (also known as Cost of Sales) is the cost that a business has to bear from buying or producing goods for sales. Cost of Goods Sold is recorded and treated as an expense in the business’ account, when the goods are sold to customers. The practical application for Cost of Goods Sold depends largely on the nature of the business. Two main types of businesses and how we should account for their Cost of Goods Sold will be discussed in this article:

  1. Cost of Goods Sold for Retailer (Example: clothes store)
  2. Cost of Goods Sold for Manufacturer (Example: factory)

COST OF GOODS SOLD FOR RETAILER
For a retailer who buys and resells products to make profit, Cost of Goods Sold is the cost related to the purchase of the products from its supplier. For example, if you are operating a clothes store, you may purchase clothes in bulk at a lower price from your suppliers. Then you will sell them at a higher price to generate revenue for your business. When you have made a sale, the cost of purchasing the products from the supplier will be recorded and treated as Cost of Goods Sold.
-Imagine if you own a clothes store.
You bought a T-shirt for resale at $10 and you sold it at $20 to your customer. What is the Cost of Goods Sold, the sales revenue and the profit?

The Cost of Goods Sold is $10 when you first bought the T-shirt from your supplier; you made $20 of sales revenue when you sold the same T-shirt to your customer. You made a profit of $10, which is the difference between the sales price ($20) and the Cost of Goods Sold ($10).
Well done, you have made a profit of $10!

 
COST OF GOODS SOLD FOR MANUFACTURER
A Manufacturer generates revenue by producing goods for sale and its Cost of Goods Sold is the cost in making these products when they are sold to the customers. The cost of goods produced in the business should include the costs related to production. Therefore, Cost of Goods Sold for manufacturing companies includes: the labour costs (wages that you pay your worker who produced the products) and the cost of the raw materials used in making the final product.
-Imagine you own a factory that produces wooden tables for sale.
You paid $100 to your workers that work on producing a table. You paid $100 to buy the raw materials (wood, glue, paint etc.) to make this wooden table. When this table is sold for 300, what is your Cost of Goods Sold, the sales revenue and the profit you have made from selling this wooden table?

The Cost of Goods Sold should be the total production cost including the $100 of labour cost and the $100 of material cost. The sales revenue of $300 is generated when you sold this table to your customers. The profit you made from this sale is the difference between the sales price ($300) and the Cost of Good Sold ($200). Congratulations, you made $100 profit from this sale!
As you can see from the above examples, we should always sell goods at a price that is higher than the Cost of Goods Sold to make a profit (Profit = Sales – Cost of Goods Sold). Therefore, knowing the Cost of Goods Sold is very important for a business to decide on the sales price of its goods. The sales price should be able to cover the cost of purchase/production and allow the business to make some profit.
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TESSA YULAN ZHANG

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4 Comments

  1. loishiye 8 years ago September 17, 2016

    Very nice lesson, I like it

    REPLY
  2. charles ngwembele 8 years ago September 17, 2016

    Very interesting article!

    REPLY
  3. Abudu Kamara 8 years ago September 22, 2016

    Thanks for you topic presented – really interesting.

    REPLY
  4. Siyanga 7 years ago November 7, 2016

    I also want to be part of the business and work very hard there to make lots of money for me to be rich like a government does.
    I want to have a good job for me and get my own office!
    I want to pass my whole subject in university of cape town then I cn become a Doctor or a businessman whatever in life and I focus on my work.

    REPLY

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