The cost of goods sold (COGS) refers to the direct costs incurred by a company in producing or acquiring the goods it sells during a specific period. It includes all the costs directly associated with goods, such as raw materials, direct labour, and manufacturing overhead. Companies may divide this amount into two parts, unadjusted and adjusted.
The unadjusted cost of goods sold is essential in understanding the expenses incurred during a period. However, it does not include certain adjustments which are a part of the adjusted cost of goods sold. It is crucial to understand how it works.
What is the Unadjusted Cost of Goods Sold?
The unadjusted cost of goods sold (COGS) is the total cost of the goods a company sold during a given period without considering any adjustments for factors such as inventory valuation or abnormal costs. Essentially, it refers to the COGS reported in the income statement associated with costs directly relating to the production process. The adjustments in inventory levels help calculate the adjusted cost of goods sold.
The unadjusted COGS provides a primary measure of the cost of goods sold. Adjustments may be necessary to arrive at a more accurate figure for financial reporting purposes. Usually, these adjustments can include inventory valuation adjustments, such as the first-in, first-out (FIFO), or last-in, first-out (LIFO) method. Similarly, it may consider other factors, such as abnormal costs or expenses associated with the production process.
How to calculate the Unadjusted Cost of Goods Sold?
The formula for unadjusted cost of sold includes all items directly contributing to the inventory sold during a period. Therefore, it consists of all direct materials, labour, and expenses that are a part of the production process. However, it does not include the additional adjustments required to calculate the adjusted COGS.
The additional adjustments not contained in the calculation for the unadjusted COGS include the following items.
- Inventory valuation adjustments: Inventory valuation methods like FIFO, LIFO, or weighted average cost.
- Reserve for obsolete or damaged inventory: Value of goods deemed outdated or damaged.
- Cost of goods in transit: Goods in transit but not yet received in the inventory.
- Abnormal or non-recurring costs: Abnormal or non-recurring costs that do not represent the typical cost structure.
What is the difference between Adjusted and Unadjusted Cost of Goods Sold?
The difference between the unadjusted cost of goods sold (COGS) and adjusted COGS lies in the additional adjustments in the calculation. Unadjusted COGS represents the basic calculation of the direct costs incurred in producing or acquiring goods sold during a specific period. It includes essential components such as beginning inventory, purchases, direct costs, and ending inventory.
Adjusted COGS takes into account specific adjustments made to the unadjusted COGS figure. These adjustments reflect more accurate financial reporting or account for certain factors that impact the cost of goods sold. The purpose of adjusting the COGS is to provide a more accurate reflection of the actual costs incurred in producing or acquiring the goods sold, considering factors that may impact the valuation or presentation of the cost of goods.
Conclusion
The cost of goods sold represents expenses incurred on the items sold during a period. Companies calculated the unadjusted COGS, which only includes direct costs associated with the production process. After some adjustments, they may reach the adjusted COGS. The primary difference between the two comes from those adjustments.
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