## Cost of Good Sold - Part 1

PART 1.   The Cost of Goods Sold Budget for a Retailer:

Below depicts the formula a retailer would use to calculate its Cost of Goods Sold.

 Beginning Inventory (in dollar) \$XXX Add: Purchases Made During the Year (in dollars) \$XXX Equals: Cost of Goods Available For Sale \$XXX Less: Ending Inventory (in dollars) \$XXX Equals: Cost of Goods Sold \$XXX

In order for you to better understand the formula, lets develop the 200X Cost of Goods Sold Budget for Murray's Scholarship Business. Please Note: Murray would use the above formula because he is considered a retailer. (IE a retailer of information). In other words, he only buys finished products or diskettes; he does not make or manufacture them.

As the formula implies, the first piece of information we need is Murray's Beginning Inventory in dollars. Since 200X will be his first year of operation, Murray would NOT have any inventory. Therefore, his Beginning Inventory in Dollars would be Zero (\$0.00 dollars). The second item needed in the formula is the cost of his purchases during 200X. Recall from Budget 3 entitled "Developing Your Purchase Budget", that Murray determined he would purchase 4,864 diskettes, at a cost of \$3.00 each during 200X. Therefore, his total purchases during 200X is expected to be \$14,592 (IE 4,864 units x \$3.00 per unit) . The third item needed in the formula is the cost of Murray's forecasted Ending Inventory. Recall from Budget 6 entitled "Developing Your Ending Inventory Budget" Murray anticipates to have 864 units (at \$3.00 per unit) in ending inventory on December 31, 200X. Therefore, his forecasted ending inventory, on December 31, 200X, is valued at \$2,592 (864 units x \$3.00 per unit).

As you can see, the information needed to develop Murray's Cost of Goods Sold Budget has already been created in his Purchase Budget and in his Ending Inventory Budget. Now lets "plug" the figures into the above formula to determine Murray's Cost of Goods Sold on December 31, 200X.

 Beginning Inventory in dollars \$ 0.00 Add: Cost of Purchases Made During the Year \$14,592 Equals: Cost of Goods Available for Sale \$14,592 Less: Ending Inventory in dollars \$ 2,592 Cost of Goods Sold \$12,000

As you can see, Murray's Forecasted Cost of Goods Sold on December 31, 200X is \$12,000. In other words, Murray's cost to purchase, and subsequently sell, 4,000 diskettes in 200X will be \$12,000. This Cost of Goods Sold amount will appear on his December 31, 200X Forecasted Income Statement. Now lets calculate Murray's Cost of Goods Sold for December 31, 200Y.

Once again, the first piece of information we need is Murray's Beginning Inventory in dollars. Since the ending inventory of one business year becomes the beginning inventory of the following business year, Murray's beginning inventory (in dollars) on January 1, 200Y will be his ending inventory in dollars on December 31, 200X. Therefore, Murray's beginning inventory on January 1, 200Y, is \$2,592 (864 units in ending inventory x \$3.00 - see ending inventory as of December 31, 200X above).

The second item needed in the formula is the cost of his purchases during 200Y. Recall from Budget 3 entitled, "Developing Your Purchase Budget", that Murray determined he would purchase 8,216 diskettes, at a cost of \$3.30 each, during 200Y. Therefore, his total purchases during 200Y is expected to be \$27,113 (IE 8,216 units x \$3.30 per unit) . The third item needed in the formula is the cost of Murray's Forecasted Ending Inventory. Recall from Budget 6 entitled, "Developing Your Ending Inventory Budget" Murray anticipates to have 1,080 units (at \$3.30 per unit) in ending inventory on December 31, 200Y. Therefore, his forecasted ending inventory on December 31, 200Y is valued at \$3,564 (1,080 units x \$3.30 per unit).

Using the information from above, and by using the formula, Murray can now determine his Forecasted Cost of Goods Sold for 200Y.

 Beginning Inventory in dollars \$ 2,592 Add: Cost of Purchases Made During the Year \$27,113 Equals: Cost of Goods Available for Sale \$29,705 Less: Ending Inventory in dollars \$ 3,564 Cost of Goods Sold \$26,141

As you can see, the value of Murray's Forecasted Cost of Goods Sold on December 31, 200Y is \$26,141. In other words, Murray's cost to purchase, and subsequently sell, 8,000 diskettes in 200Y will be \$26,141. This Cost of Goods Sold amount will appear on Murray's December 31, 200Y Forecasted Income Statement.

Murray's Cost of Goods Sold Budget on December 31, 200X and December 31, 200Y can be summarized in the following manner.

 COST OF GOODS SOLD BUDGET For Years ending December 31, 200X and 200Y 200X 200Y Beginning Inventory \$ 0.00 \$2,592 Direct Materials Purchased \$14,592 \$27,113 Cost of Goods Available for Sale \$14,592 \$29,705 Less: Ending Inventory \$ 2,592 \$3,564 Cost of Goods Sold \$12,000 \$26,141

Some retailers use the term cost of goods sold and cost of merchandise sold interchangeably, which is fine.  Just remember, retailers do not include labor nor overhead in their cost of goods sold.  Retailers may acquire additional information by referring to the section entitled cost of Merchandise Sold.

Categories: Forecasting