Costs of Goods Sold

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Transcript Costs of Goods Sold

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• The N9G tool box provides the field with helpful information
on wide range of subjects.
• The tool box provides information to CNIC Regions &
Installations; keeping them “audit-ready” at all times.
• We have provided each of you with a tool box, just make sure
as we provide you a tool monthly, you keep it in your tool box!
Topics that will be filling your Tool Box
Cost of Goods Sold
Cash & Cash Handling
Managers Financial Review
NAF Personnel
Assets Inventory
Cost of Goods Sold
Cost of goods sold or COGS refer to the value of goods sold during a
particular period
Costs are associated with particular goods using one of several formulas, including
specific identification, first-in first-out (FIFO), or average cost. Costs include all costs
of purchase, costs of conversion and other costs incurred in bringing the inventories
to their present location and condition.
Cost of goods sold
The cost of the resale item that was sold to customers. The cost of goods
sold is reported on the income statement when the sales revenues of the
goods sold are reported.
Cost of Goods Sold
Calculating COGS
On a monthly basis you must perform the following:
•Find your beginning inventory for the month you are calculating. (This will be the same
number as the ending inventory from the previous month. You should be able to find this number on last month's balance
•Add the cost of purchases made during the month to the beginning inventory
number. This would also include Mess Requisitions (These are any items which have been
procured/mess requisitioned during the month that you will sell. Do not include office supplies in this number, as those are
indirect expenses)
Calculate the subtotal of the beginning inventory, plus cost of items purchased and/or
transferred in. Subtract the ending inventory value for the month from the subtotal you
just calculated. This number, after subtracting, is your cost of goods sold. Remember
this includes only direct cost of the goods purchased for resale.
Beginning Inventory + Purchases/Mess Requisitions – Ending Inventory= COGS
Cost of Goods Sold
•Items purchased for the purpose of being sold to customers.
The cost of the items purchased but not yet sold is reported in the resale inventory
account or central storeroom inventory account. Inventory is reported as a current asset on
the balance sheet.
Inventory is a significant asset that needs to be monitored closely. Too much inventory can
result in cash flow problems, additional expenses and losses if the items become obsolete.
Too little inventory can result in lost sales and lost customers.
Inventory is reported on the balance sheet at the amount paid to obtain
(purchase) the items, not at its selling price.
Cost of Goods Sold
• Inventory management
Involves regulation of the size of the investment in goods on hand, the types
of goods carried in stock, and turnover rates.
The investment in inventory should be kept at a minimum consistent with
maintenance of adequate stocks of proper quality to meet sales demand.
Increases or decreases in the inventory investment must be tested against the
effect on profits and working capital.
Standard levels of inventory should be established as adequate for a given
volume of business, and stock control procedures applied so as to limit purchase
as required.
Such controls should not preclude volume purchase of nonperishable items
when price advantages may be obtained under unusual circumstances.
The rate of inventory turnover is a valuable test of merchandising efficiency
and should be computed monthly
Cost of Goods Sold
• Inventory management
All inventories are valued at cost which is defined as invoice price plus freight
charges less discounts.
Inventory items received at no cost are recorded as a debit to the inventory
account and a credit to Bonus Merchandise.
End-of period physical inventories are valued at or priced on the first-in first-out
(FIFO) basis. In FIFO, requisitions are priced at the earliest invoice cost at which
the items were placed in stock.
Quantities on hand at the inventory date are considered to be those items most
recently purchased.
When possible, individuals familiar with departmental stock will be assigned to
taking inventory. Counter will be indoctrinated thoroughly not only in the method
of counting but also in the system of recording the count, for example, the count
proceeds from left to right, top to bottom, in book-reading fashion.
Cost of Goods Sold
•Inventory management
Completed by a team of two people.
One will call and inspect the inventory while the other enters (in ink) the quantities
on the sheets.
Each department will be inventoried separately. (example: Food, Bar)
 During the course of the inventory, independent test checks will be conducted to
insure the maximum of accuracy.
 Items found to be on hand, which were omitted from the inventory sheet, will
be recorded by the inventory team, provided such items can be positively
identified as activity owned property.
Unit prices for retail department merchandise will be taken from current vendor
invoice at the time of count.
Cost of Goods Sold
•Inventory management
All merchandise will be listed and counted in the same unit category as priced for
sale Only the unit cost price will be shown for service department items. This will be
taken from the vendor invoice. The same person inserting the unit price amount also
records the unit "type" such as dz., ea. gr.
•Inventory Count
 All counts, identification, and pricing of inventories are to be adequately
rechecked by a disinterested party* other than the one who recorded the original
All inventory counts are to be verified and audited by the accounting staff.
*Disinterested party is defined as anyone who does not work or manage the
facility i.e., Bowling Center personnel would be a disinterested person for the golf
course etc.
Cost of Goods Sold
Extension of Inventory Sheets
All inventory count sheets will be extended and totaled by personnel in the accounting office.
Departmental Inventory Worksheets
After the inventory work sheets have been extended and totaled, inventory sheets will be
summarized in value by department.
•These values will then be compared against the book inventory.
• Retail variances will be converted to cost by multiplying retail variances by departmental
cost ratios.
Note: Variances in inventory have a major impact on cost of goods; therefore, all discrepancies
must be investigated to determine the validity of the disparity. During the “soft close” of SAP,
review your COGS, you have ample time to correct inventories prior to the final close out of SAP
It is also imperative that costs of goods are reviewed on a monthly basis. This will provide the
manager with a working document with which to assess the business as well as detect possible theft
within his/her facility.
Cost of Goods Sold
• Knowing the cost of sales for your industry is critical to maximizing your profit.
• Consider the following businesses, both with identical revenues and operating
XYZ Company, with cost of sales 2% higher than ABC Company, makes a
$365,000 profit. ABC Company, with a 2% lower cost of sales, generates an
additional $70,000.00, an increase of 19% in net income. Because they pay close
attention to their cost of sales, ABC Company has a higher gross profit margin
and is substantially more profitable than XYZ Company.
Cost of Goods Sold
Helpful Hints:
Formula to Calculate COGS percentage:
COGS / Revenue = %
$10,000 (COGS) / $50,000 (Revenue) = 20%
75% Retail
25% Bar
38% Food
Cost of Goods Sold
Check your COGS % during the SAP “Soft Close.” If it is not close to the
CNIC targets, try checking some of the hints below before the final monthly
• Is the inventory completed properly?
• Have all Mess Requisitions been recorded? (These should be turned in as they are used, not at
the end of the month, ensure you give a copy to the accounting office and maintain a copy locally)
• Have all your purchases been properly recorded?
• Have supplies been charged to the 151 account instead of the 701 account?
• Do all the expenses that are charged to your code belong to you?
• Have you been monitoring your sales and inventory weekly?