Purpose of Cost of Goods Sold
Cost of Goods Sold (COGS) serves the following purposes:
1. Accurate Cost Allocation: Cost of Goods Sold (COGS) aims to accurately allocate the direct costs associated with the production or purchase of goods to the items sold during a specific accounting period. This allocation is essential for determining the true profitability of a company’s core operations by subtracting these direct costs from total revenue.
2. Inventory Management Insights: COGS facilitates effective inventory management by providing insights into the relationship between production costs and sales. It allows businesses to evaluate the efficiency of their production processes, make informed decisions about pricing strategies, and identify areas for cost reduction.
3. Contribution to Financial Reporting: COGS is crucial for financial reporting, as it contributes to the calculation of the gross profit margin, a key performance indicator that reflects the efficiency of a company’s production and sales processes.
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