Is The Cost Of Goods Sold An Asset Or An Expense

Cost of goods sold is the term that is used to represent the direct cost of a product to produce and sell that product. COGS include raw materials, direct labor, the special expense for hiring the tools, and manufacturing overheads.

Is The Cost Of Goods Sold An Asset

The cost of goods sold is an expense for a company that is recorded in the statement of profit and loss when goods are sold. But if there is no sale during the business cycle then the cost of goods sold is recorded as an inventory under the heading of current assets in the statement of financial position. 

For calculating the cost of goods sold, use this formula:

COGS= Inventory at the start + current cost of goods – inventory at the end.

How Cost Of Goods Sold Changes

There are many reasons that affect the cost of goods sold. Some of the main reasons are the followings:

• Changing in the price of raw materials can impact the COGS
• An increase or decrease in the labor hours or wages can also change the COGS
• Changes in overheads also impact COGS
• The method of allocating cost can also impact COGS
• Wastage of inventories also changes the cost of goods sold, etc. 

Why Cost Of Goods Sold Is Important

It is very necessary to calculate the cost of goods sold properly and accurately because it impacts so many things in the accounting records. Here are some of the major reasons why the cost of goods sold is important.

• COGS is essential in calculating the actual profit of a company
• The calculation of COGS enables management to take decisions wisely as per the price, productions levels, and demands in the market
• COGS is an important tool to evaluate the performance of the company
• Properly calculating the COGS prevent the excess taxation
• COGS is essential for making the future budget for a company
• The calculation of COGS helps a company control the cost for the next time
• It helps management to decide the price of a product
• COGS helps management to maintain inventory levels, etc. 

FAQs

Why is the cost of goods sold an asset?

COGS is an expense in a business that involves producing and selling goods or services but some businesses record it as an asset because it directly relates to the production.

Where is the cost of goods sold on the balance sheet?

The cost of goods sold is recorded in the income statement after the sales which is then deducted from the sales to give the gross profit for the year.

Is the cost of goods sold an expense?

Yes, COGS is a direct expense.