# Cost of goods sold

by David Bazile
(Manhattan )

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.
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Hi David!

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?

Kathy

### Comments for Cost of goods sold

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 Sep 29, 2013 Rating Cost of Goods Sold by: David Bazile Hi Kathy, Thank you for your detailed insight on calculating the cost of goods sold. What really confused me, was knowing what has to be included in the calculations. But you made it seem simple. Thank you again.

 Sep 22, 2013 Rating Cost of Goods Sold by: David Hello Kate. Thank you for your input once again on this subject. Keeping track of products by unit makes more accurate sense. Now all I have to do is figure that out for all sales.

 Sep 18, 2013 Rating in answer by: Kathy David, If the owner purchases fabric and lace, etc., to make products, you have to find out how much is used on one product. For example, say you're making one dress. Say it uses 2 yards of fabric, 1 yard of lace, and 4 yards of thread. Take the cost of the material, break it down by yard, then use it to calculate your Cost of Goods Sold. So if the fabric is \$8/yard, the lace is \$2/yard, and the thread is .10/yard... Then the dress Cost of Goods Sold is calculated at 2 x \$8 = \$16 fabric, plus 1 x \$2 = \$2 lace, plus 4 x .10 = \$0.40 thread, for a total cost of \$18.40. Now remember, that's just for materials. You also need to factor in the cost for labor (time spent sewing) and a portion for overhead. Hope that helps!

 Sep 17, 2013 Rating Cost of goods sold by: Anonymous Pardon me for the late response to your post, for i have been busy with school and i'm now checking your comment. After reading your post I now have another question. In the business I'm at, the owner makes purchases of trimmings,fabric, buttons, patterns, lace, and so forth. How do you use those purchases in calculating the Cost of goods sold?