The cost of products sold (COP) is a key indicator in a manufacturing company’s financial management. It includes all expenses incurred in manufacturing products sold in a given period. Correctly calculating the cost of products sold allows you to accurately determine your business’s profitability and is essential when preparing financial statements. We will present how to calculate the cost of products sold, explain the formula for its calculation, and discuss two variants of its accounting: comparative and calculation.
How do you calculate the cost of products sold?
Cost of goods sold includes all costs associated with producing goods sold during the period. To calculate the COP, it is necessary to consider three main elements:
- Direct costs: raw materials, materials, wages, and salaries of production workers directly attributable to the products produced.
- Indirect production costs: costs necessary for the production process's operation but cannot be directly attributed to a specific product (e.g., energy costs, machinery depreciation).
- Change in inventory: the difference between the cost of manufactured products and the inventory of finished products.
The process of calculating the cost of products sold consists of the following steps:
- Determining the cost of manufactured products in each period.
- Considering the change in inventory.
- Final allocation of the expenses to products sold.
Cost of products sold formula
The formula for calculating the cost of products sold is as follows:
KWSP = Cost of products sold in the period ± Change in inventory.
- If the inventory of finished products at the end of the period is higher than at the beginning, the difference reduces the value of KWSP (we subtract the change in inventory).
- If inventories of finished products at the end of the period are lower than at the beginning, the difference increases the value of KWSP (we add the change in inventories).
Example: Suppose the cost of finished goods in each period is PLN 100,000. At the beginning of the period, inventory was PLN 20,000; at the end, it was PLN 10,000. Then:
KWSP = PLN 100,000 + (PLN 20,000 – PLN 10,000).
KWSP = PLN 100,000 + PLN 10,000 = PLN 110,000.
Cost of goods sold in the comparative variant
The comparative variant of the cost of products sold involves presenting the financial result by comparing sales revenues with the cost of their manufacture. This analysis method benefits companies with many sales transactions and those that want to focus on core operating activities.
Elements of the cost of products sold in the comparative variant:
- Cost of finished goods.
- Inventory storage costs.
- Product transformation and finishing costs (if applicable).
The comparative variant is more complex, requiring accounting for inventory changes and additional costs. However, it is more detailed and accurately reflects the company’s financial results.
Cost of products sold under the calculation variant
The costing variant differs from the comparative approach to accounting for costs. In this case, the cost of products is allocated on an ongoing basis to products sold, which allows for more accurate tracking of costs associated with specific transactions.
Cost elements in the costing variant:
- Direct costs are allocated to each product sold.
- Indirect costs are allocated proportionally to all products sold during the period.
- There is no need to consider inventory changes since cost accounting is done continuously.
The imputed variant is advantageous in companies with complex production processes, where allocating costs accurately to individual products or transactions is necessary.
The cost of goods sold is a key financial indicator in manufacturing companies, influencing profitability assessment and strategic decision-making. Comparative and imputed variants have advantages and applications depending on the company’s business.
Understanding how to calculate the cost of goods sold, use the right formula, and choose the correct accounting variant allows entrepreneurs to manage costs more effectively and make better business decisions. In comparative and calculation variants, KPI analysis provides invaluable information about the company’s operation and ability to generate profit.
