Cost of goods sold is a familiar term for manufacturing businesses. This is also an important indicator in financial reports, directly affecting the profit of the business. In this article, let's learn with 1C Vietnam about the concept of cost of goods sold, its components and the most accurate formula for calculating cost of goods sold.

1. What is cost of goods sold?

Cost of Goods Sold is all costs related to the process of manufacturing or importing products. These costs include raw material costs, labor costs, production costs, business management costs, freight costs,...

2. What does cost of goods sold include?

Cost of goods sold is one of the key factors in determining a business's profit. Cost of goods sold includes the following:

• Direct material costs: Includes costs directly related to product production, such as costs of main raw materials, input materials, packaging materials, etc.
• Direct labor costs: Are costs directly related to the production of products and goods, including salaries, wages, allowances,... of employees.
• General production costs: This cost is related to the production process of goods but cannot be directly determined for each specific product, including costs of depreciation, maintenance, and repair of machinery and equipment. utility costs,...
• Purchasing costs: Includes costs related to the purchase of goods and services, such as purchasing costs, shipping costs, loading and unloading costs, etc.

In particular, the two main components that make up the cost of goods sold are direct materials costs and direct labor costs. Manufacturing overhead and purchasing costs can be allocated to each specific product or commodity or in a certain proportion.

3. Formula to calculate cost of goods sold quickly and accurately in 2024

Currently, there are a number of methods to determine cost of goods sold that businesses can apply. For example:

3.1 FIFO first-in, first-out calculation formula

The FIFO (First In, First Out) method is a way to calculate cost of goods sold based on the price of the products and goods first warehoused in corresponding quantities. If there is not enough, this method will take the prices of the next imported products in order.

This method has the following outstanding advantages and disadvantages:

The first-in, first-out – FIFO method has the following formula:

Cost of goods sold = Price of products and goods first warehoused

Example of calculating cost of goods sold using the first-in, first-out formula:

An enterprise manufacturing and trading leather shoes has the following information:

• Inventory at the beginning of the period: 150 products at a price of 150,000 VND/product.
• First warehouse entry: 60 products at 120,000 VND/product.
• Second warehouse entry: 120 products at 70,000 VND/product.

The cost of goods sold formula for 150 products sold is determined as follows:

(150,000 x 150) + (120,000 x 60) = 29,700,000 VND.

3.2 LIFO last-in, first-out calculation formula

The LIFO (Last In, First Out) method is a way to calculate cost of goods sold based on the prices of the most recently warehoused products and goods. In case of shortage, this method will take the price of the previous lot. Therefore, applying the LIFO method helps managers accurately reflect the actual value of ending inventory.

The LIFO method is suitable for manufacturing businesses that frequently change product designs or trade in products with a long shelf life. In particular, products with a long shelf life often have high value and slow price fluctuations, helping businesses minimize risks from price fluctuations.

The last-in, first-out method – LIFO has the following formula:

Cost of goods sold = Price of final warehoused products and goods

Example of calculating cost of goods sold using LIFO formula:

An enterprise manufacturing and trading leather shoes takes the following steps:

• First warehouse entry: 20 products at 100,000 VND/product.
• Second warehouse entry: Add 25 products at 110,000 VND/product.

After that, the company sold 30 products.

Applying the LIFO last-in, first-out method, the cost of goods sold of 30 warehoused products is calculated as follows:

(20 x 100,000) + (10 x 110,000) = 3,100,000 VND.

3.3 Weighted average formula

The heirloom average method is a way to calculate the cost of goods sold based on the ratio of the total value of inventory compared to the total inventory before and after import. Currently, this method is widely used by many businesses from small to large.

The method includes the following outstanding advantages and disadvantages:

According to this method, the cost of goods sold is determined based on the average price of all products and goods in stock at the time of sale and is calculated using the following formula:

Average cost of goods sold = Total value of inventory before import + Total value of inventory when newly importedTotal amount of inventory before and after import

The weighted average method is suitable for manufacturing enterprises whose product prices are stable and do not fluctuate significantly during the period. For example, electronic products, refrigeration products,... this method can accurately reflect the actual value of inventory.

Example of calculating cost of goods sold using the weighted average formula:

An enterprise manufacturing and trading leather shoes takes the following steps:

• Inventory at the beginning of the period: 100 products at a price of 100,000 VND/product.
• First warehouse entry: 50 products at 120,000 VND/product.
• Ending inventory: 150 products.

We calculate:

• The average price of inventory is as follows:

(100 x 100,000 + 50 x 120,000) / (100 + 50) = 108,000 VND/product

• Calculate the cost of goods sold for 150 products sold:

108,000 x 150 = 16,200,000 VND.

4. How important is cost of goods sold?

Cost of goods sold reflects all costs directly incurred in the production of goods. This is the basis for calculating total costs and determining net profit, as well as determining the amount of corporate income tax that needs to be paid. This index plays a huge role in the Business Performance Report, being the basis for calculating gross profit - an index showing the business performance of the enterprise.

The business market is constantly fluctuating and commodity prices frequently change, making commodity pricing unstable for businesses. In particular, for commercial enterprises, they often have to manage many different types of goods. Reasonable cost accounting helps businesses manage and optimize costs in a detailed and accurate manner.

If cost of goods sold increases, gross profit will decrease and vice versa. This can reduce or increase the profit a business can achieve from selling goods.

5. Accounting for cost of goods according to Account 632

Businesses that apply the regular declaration method can perform cost of goods sold accounting in the following ways:

a) When selling products or goods, determine the terms as follows:

Debit Account 632 – Cost of goods sold

There are accounts 154, 155, 156, 157,...

b) Reflect on costs that are directly accounted for in cost price:

Unallocated fixed manufacturing overhead costs (not included in the product cost due to the difference between the total actual fixed manufacturing overhead costs and the fixed manufacturing overhead costs included in the product cost) are recorded. received in cost price during the period.

6. Manage cost of goods effectively with 1C:Company Management software

Managing cost of goods is an important part of every business's business activities. To optimize the cost of goods sold management process, businesses can use 1C: Company Management software.

1C:Company Management provides tools and features to help businesses manage and track cost of goods intelligently. Below are some strengths of this software in managing cost of goods:

• Automatic accounting: The software allows automatic accounting of cost of goods when there are sales transactions, helping to save time and minimize errors during data entry.
• Track production costs: 1C:Company Management allows businesses to track and reflect direct and indirect production costs into the cost of goods in a detailed and transparent way.
• Performance analysis: The software provides data analysis tools to evaluate business performance, including gross profit, price fluctuations and production costs, thereby helping businesses make informed decisions. pricing and production strategies.
• System integration: 1C:Company Management can integrate with other systems such as warehouse management, production management, and accounting systems, helping to optimize work processes and create an information system connection and unity.

Hopefully through this article, businesses will have a deeper insight into the concept, components as well as the formula for calculating the exact cost of goods sold . It can be seen that fluctuations in cost of goods sold can directly affect corporate profits. To manage cost of goods sold well, businesses can use 1C:Company Management software. This is a comprehensive business management solution, featuring financial management features, connecting many departments together, allowing control of revenue and expenditure plans, tracking loans, debts, etc. .Contact 1C Vietnam hotline (+84)247 108 8887 for more detailed advice about this software.