What is the formula to calculate the cost of goods sold (COGS)?a)Opening Stock + Purchases + Direct Expenses - Closing Stockb)Opening Stock + Purchases - Direct Expenses - Closing Stockc)Opening Stock + Purchases - Closing Stockd)Opening Stock - Purchases + Direct Expenses + Closing StockCorrect answer is option 'C'. Can you explain this answer?

Question

Answer

Formula to Calculate Cost of Goods Sold (COGS)

The formula to calculate the cost of goods sold (COGS) is:

Opening Stock + Purchases - Closing Stock

Explanation

COGS refers to the direct costs incurred in producing or acquiring the goods that are sold by a company. It includes the cost of raw materials, direct labor, and any other direct costs associated with the production or acquisition of goods. COGS is an important figure used in determining the profitability of a company.

To calculate COGS, the following components are considered:

1. Opening Stock: Opening stock refers to the value of inventory or goods held by a company at the beginning of an accounting period. It represents the cost of inventory from the previous period that is available for sale in the current period.

2. Purchases: Purchases represent the cost of goods acquired by a company during the accounting period. This includes the cost of raw materials or finished goods purchased from suppliers.

3. Closing Stock: Closing stock refers to the value of inventory or goods held by a company at the end of an accounting period. It represents the cost of inventory that remains unsold or unused at the end of the period.

The formula for COGS (Opening Stock + Purchases - Closing Stock) takes into account the change in inventory levels from the beginning to the end of the accounting period. By subtracting the closing stock from the sum of opening stock and purchases, we arrive at the cost of goods that have been sold during the period.

The COGS figure is important for calculating the gross profit of a company, which is the difference between net sales revenue and COGS. It provides insights into the efficiency of the production or acquisition process and helps in evaluating the overall profitability of a business.

In conclusion, the correct formula to calculate the cost of goods sold (COGS) is Opening Stock + Purchases - Closing Stock. This formula considers the value of inventory at the beginning and end of the accounting period, as well as the cost of goods acquired during the period, to determine the cost of goods sold.

Answer

The cost of goods sold is calculated by adding the opening stock and purchases together and then subtracting the closing stock. Direct expenses are not subtracted in this formula as they are already included in the cost of purchases.

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