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Cost of Goods Sold is calculated as such:
Opening Inventory
Purchases
Closing InventoryI have several questions here:
1) Could you please tell me what includes in the Purchases?
2) And what is the difference between purchases and production costs (that includes material cost, labour cost and overheads?)
3) Production costs include material costs, labour costs and overheads. correct?
4) Purchases and Production costs mean the same thing. correct?
If they are buying ‘ready-made’ goods from someone else and then selling them, then the cost of goods sold is the opening inventory plus purchases less closing inventory.
If they are making the goods themselves, then the cost of goods sold is the opening inventory plus the cost of production less the closing inventory.
The cost of production is the total of the purchases (of raw materials) plus the labour costs plus the production overhead costs.
(If it is marginal costing then only variable production overheads are included, if it is absorption costing then all production overheads are included.)
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