What is the relationship between inventory and the cost of sold goods?

The cost of the goods sold (COGS) is part of the company's inventory. The inventory and costs of the goods sold have a directly dependent relationship in practice and books. In practice, the company cannot have supplies without having adequate costs that allowed it to generate this inventory. In the books, COGS is deducted from income to determine the gross margin or the amount of profit that has achieved the sale of the company inventory. Depending on the type of business, the relationship between stocks and the costs of the goods sold may be more or less complicated. For example, for production business, this includes raw material costs, direct costs for the production of goods, the share of costs for equipment that can be directly assigned to the production process and used goods for sale for sale.

However, COGS is simply the cost of purchasing inventory from a wholesale or manufacturer, the cost of preparing for sale and the cost of sales. The relationship between the two in the production environment is somewhat more complex.It is usually easier to segment the relevant costs in the retail environment that should be assigned to the COGS category.

The most important connection between inventory and COGS is the way both relate to the company's profitability. Revenue is the amount of money that the company receives as a result of the sale of its products. This number is important, but it does not reflect whether society earns money or loses money. Profitability can only be determined after the company owner deducts the costs incurred in generating this income.

The basic level of the basic level must know its gross margin or profit when reversing the inventory before considering other expenses such as taxes. To find out, the cost of producing and selling inventory or cogs is deducted from income. Inventory and cost of sold goods are inseparable in this analysis because the use of the value of these two categories youIt builds basic business facts, for example whether the owner sets his goods on sale at a level that makes him profit.