The difference between Cost of Production and Cost of Goods Sold

Rancakmedia.com – In doing business, we must know what is the difference between the cost of goods manufactured and the cost of goods sold, therefore in the article below we will provide the information.

As a businessman, surely you are very familiar with the terms cost of goods sold and cost of goods manufactured. Although it looks almost the same, there is actually a difference between the cost of production and cost of goods sold.

The price of goods sold and the price of goods produced are two things that cannot be separated in the realm of trade. Then, what is the difference between cost of production and cost of goods sold? Let's debate together below.

The difference between Cost of Production and Cost of Goods Sold

The following is an explanation of the difference between the cost of goods manufactured and the cost of goods sold.

Cost of goods sold

Basically, the cost of goods sold is all the costs necessary to produce a product or service that is sold to consumers. Materials, direct labor, and overhead expenses make up most of these costs.

In service companies, the cost of goods sold will be charged as wages and labor taxes. Products obtained from manufacturers or suppliers are included in the wholesale cost of goods sold. Cost of goods sold is calculated using a periodic inventory system by first adding beginning inventory and purchases, and then subtracting ending inventory from the total.

As the goods are no longer stored, they are sold so the final cost will be tied to the sale of those items. This reduction in costs actually includes inventory that is written off or rendered obsolete and withdrawn from inventory, or inventory stolen.

Many of the expenses for the various items sold, as well as costs that are more closely related to the current period, will be fixed in this calculation. In an inventory system, cost of goods sold must be calculated over time, as goods are to be sold to clients.

Using this method, a large number of transactions, such as memorandums, will be recorded individually. Cost of goods sold may be more accurately calculated by a cyclical account than by a periodic inventory system if the quality of records is maintained.

Cost of goods sold

Production costs are all costs incurred by the company to produce a production of goods or products which include direct costs and indirect costs, so that the company will be able to determine the price of the goods produced before selling. Why do companies have to calculate the cost of production?

The purpose of determining the cost of production is so that the company can determine the price of the products that have been produced, so that the goals in product marketing will be in accordance with the targets intended by the company.

How to Calculate Cost of Goods Sold

Calculating product costs is as simple as using the following equation:

1. Cost of Goods = Raw Material Costs + Labor Costs + Factory Overhead Costs
2. If you have calculated the amount of production of an item, but the product you produce is more than 1. How do you calculate it?
3. Cost of goods per item = All production costs: Number of products produced

How to Calculate Cost of Production

Calculating cost of production is as simple as using the following equation:

1. Cost of Goods = Raw Material Costs + Labor Costs + Factory Overhead Costs
   If you have calculated the amount of production of an item, but the product you produce is more than 1. How do you calculate it?
2. Cost of goods per item = All production costs: Number of products produced

Elements of Cost of Production

Below are the elements of the cost of production, as follows:

Raw Material Inventory

This is the most important part of any cost of goods manufactured report. Why is that? Because companies that produce products convert raw materials into finished goods, to make a product the company must have raw materials as its main components.

Work in Process Inventory

Raw materials in the company's inventory will be converted into finished goods, but not all available goods can be accessed at once. Therefore, the company immediately has an inventory of goods in the production process.

Keep in mind that determining the cost of production is by estimating the cost of goods sold (HPP) of a product to be sold.

Elements of Cost of Goods Sold

In the Cost of Goods Sold, there are various key elements, namely as follows:

Beginning Merchandise Inventory

The term “beginning inventory” refers to inventory that is accessible at the beginning of the accounting period for a business. The initial inventory balance for this item can be seen in the trial balance of the previous year, both in the current account and at the beginning of the company's establishment.

Ending Merchandise Inventory

In accounting, ending merchandise inventory refers to the items remaining in inventory at the end of the current accounting period or budget year. At the end of the accounting period, the company's adjusting data includes the value of this balance.

Net Purchases

Net purchases in Cost of Goods Sold include all purchases of company goods, whether paid for in cash or on credit. Additionally, combined with purchase transportation costs minus purchase discounts and current purchase returns.

Factors considered in net purchases include:

1. Gross purchase
2. Price reduction
3. Purchase return
4. Discount

The net purchase value is obtained by adding up the purchases with the purchase costs of transportation and then deducting the purchase returns amount from the purchase discounts.

Net sales

Net sales are one of the company's revenue factors. Some of the components that make up net sales are as follows:

1. Purchase return
2. Gross purchase
3. Price reduction
4. Freight costs are not included because it includes general costs.

The net sales value is obtained from the sales value minus the sales return value which has been added up with sales discounts.

Elements of Cost of Production

Element production costs there are three components of production costs according to Carter (2009), namely:

Direct Material Cost (Direct Material Cost)

Direct material costs are costs associated with materials that may be directly related to finished goods. Tobacco for the cigarette industry and wood for the furniture industry are two examples.

Direct Labor Cost

Goods directly involved in the production process or with the final product are considered direct labor costs. Direct workers, such as cigarette manufacturers in tobacco companies or carpenters in furniture companies, are good examples.

Factory Overhead Costs (Factory Overhead)

Overhead costs are all costs incurred by manufacturing facilities that are not directly related to purchasing raw materials or providing direct labor. These expenses cannot be directly linked to company goods.

An example of this is as follows:

1. Auxiliary materials or indirect materials such as production tools, paint, carving machines in the furniture industry.
2. Foreman compensation, for example, is an example of indirect labor because it is not directly tied to the goods produced.
3. Maintenance and repair (repair and maintenance).
4. Electricity, telephone and water costs.

Benefits of Cost of Goods Sold (HPP)

1. As a standard for calculating product selling prices.
2. Find out the profit the company gets from generating sales

Conclusion

Costs of production and selling are closely related in the field of commerce, but there are important differences between the two. Production costs are all costs incurred by a company to produce a production of goods or products.

It includes direct costs and indirect costs so that the company will be able to determine the price of the goods produced before they are sold. Calculating product costs is as simple as using the following equation.

All production costs are included in the cost of goods. The company's initial inventory balance can be seen in the previous year's trial balance, both in the current account and at the beginning of the company's accounting period.