Understanding why we calculate the COGS is probably the most difficult aspect of this subject. (purchases – purchase returns + carriage inwards = net purchases) Why we calculate the COGS Opening inventory + net purchases – closing inventory = COGS This is simply the equation plus the sub-calculation for net purchases. In other words, if we have all but one of the COGS figures then as long as we understand how the equation works, we can always find the one that’s missing. This is where the wiring of the plug comes in as long as you know where two of the wires go then you can work out where the third belongs. Once we have that sorted for a set of complete accounts, we then have to step up a level in the application of our understanding and skills, to start problem solving by manipulating the equation. It’s a challenging area as you first need to know what’s included, then understand why we calculate it and finally how to do it. This article is actually about the cost of goods sold (COGS) equation and how to manipulate it to find missing figures when working on a set of incomplete records. This may seem like a strange introduction to a study tips article but the links between knowledge, understanding and skills are the same. You need to know it and understand what to do with it before you can move on to applying the skill of actually doing it. That knowledge is the foundation of being able to wire a plug. ManyĬompanies find that centralizing spending through investment in e procurement and other spending controls lower some of the variable direct and indirect material costs.I’m not sure if you can even open a plug up anymore to see the wires inside, but if you can and did, then you would see that there are three: Low cost country sourcing to increased use of automation. Some areas of opportunity for cost reduction range from Take what they learn from the COGS and look for opportunities to cut Strategic cost control strategies allow companies to Management is considering budgets, a key focus should be looking at Transferred to the periodic income statement of the business. Should adequately account for both direct and indirect manufacturingĪfter you calculate cost of goods sold, it is The earlier calculation of cost of goods manufactured
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