Cost of goods sold
by David Bazile
From Ask the Expert:
Hello Kate! Hope all is going well. I have a question and it pertains to cost of goods sold.
I understand this concept at the basic level. When you work in a retail business and the owner has to sell product or produce new products. How do you calculate cost of goods sold for each sale? I know that the owner has to purchase tread, patterns and so forth.
To calculate a cost of goods sold for each sale, you have to start keeping track of purchases in terms of a unit of product.
Let's say you purchase 100 widgets for $600, and it takes 3 widgets to make 1 product. If you sell 20 products, the cost of materials for 20 products would be $18 ($600/100 widgets = $6 per widget x 3 widgets per product).
Then you add in direct labor - say it took one employee 4 hours to make 20 widgets, at $10/hour = $40.
Then add in overhead. You have to put a price on an hour of shop time. Calculate heat, lights, management salary, advertising and other direct costs for an average month, then divide that by available shop hours in a month. Say you add up you electric bill, managers salary, average advertising costs, shop supplies, etc., and it totals out to $600 for a month. You work one shift of 8 hours each Monday thru Friday so that's 40 hours a week, or 160 hours a month. So $600 divided by 160 = $3.75 overhead charge per hour worked.
That's a simplified example, but you see the process.
Add direct materials of $18, direct labor of $40, and overhead of $3.75 x 4 hours of labor = $15, for a grand total of $73 cost of goods sold for that sale of 20 widgets.
Does that all make sense?