Cost of goods purchased

From CEOpedia | Management online

Cost of goods purchased in a very general sense it can be said that it is the purchase price of goods sold during a specified period,including transportation costs [1]. The retail industry introduces a new element to our income and expense statement: cost of good sold. This variable implies that there is a cost to what is being sold beyond the direct client costs that we saw in the service industry. Cost of goods sold has two subsets: cost of goods manufactured and cost of goods purchased [2].

Cost components of purchased goods

Cost of purchased goods includes [3] [4] [5] :

  • Custom duty paid for purchase of imported finished goods - Custom duty paid on the imports purchases is added value. Also other charges related to the delivery like transportation, clearing agent charges are added to the value .
  • Transit insurance of finished goods - Where transit insurance is involved for the shipments of finished goods, the cost is treated as distribution overhead.
  • Carriage paid for finished goods
  • Loading and unloading charges paid for finished goods

Reduced costs of goods purchased

The key to reduced costs of goods purchased is an increase in buyer power. The more a company buys from the same supplier and the longer the relationship with supplier, the better the buyer's bargaining position. Accordingly, the enterprise should consolidate buying as much as possible by reducing the number of suppliers and choosing those which bring it most overall value (price, consistency of supplies, timeliness of delivery etc.). The less consolidated the supply chain, the more savings a company can achieve by improving its strategic sourcing. Greatest savings can often be achieved in the purchase of non-production goods, and on consolidation of the secondary supplier base [6] .

Examples of Cost of goods purchased

  • The cost of goods purchased refers to the total cost associated with buying goods from a supplier for resale. This includes the purchase price of the goods, any shipping or delivery costs, and any applicable taxes. For example, if a retailer orders a dozen items from a supplier at a total cost of $500, including a $50 shipping fee and a $25 sales tax, the cost of goods purchased would be $575.
  • In the manufacturing industry, the cost of goods purchased includes the cost of raw materials and components used to produce a finished product. For example, the cost of goods purchased for a manufacturing company could include the cost of the various metals, plastics, and other components used to assemble a finished product, as well as the cost of any energy used in the production process.
  • In the restaurant industry, the cost of goods purchased can include the cost of food and beverage items used to prepare and serve meals. For example, the cost of goods purchased for a restaurant could include the cost of ingredients used to make meals, such as flour, butter, and eggs, as well as the cost of beverages, such as coffee, tea, and soft drinks.

Advantages of Cost of goods purchased

The Cost of Goods Purchased is a useful tool for businesses to track, analyze and manage their inventory costs. It provides key insights into overall financial performance and can help identify areas of improvement. The following are some of the advantages of using the Cost of Goods Purchased:

  • Allows for better understanding of inventory costs: Cost of Goods Purchased makes it easier to track and analyze inventory costs, and to identify areas where costs can be reduced.
  • Helps improve profitability: Utilizing the Cost of Goods Purchased can help businesses improve their bottom line by reducing waste, improving efficiency, and increasing cost savings.
  • Improves business decisions: Cost of Goods Purchased provides insights that can help businesses make better decisions in terms of pricing and inventory management.
  • Provides visibility into inventory: Cost of Goods Purchased gives businesses visibility into the true cost of their inventory and can help them better evaluate their supply chain.
  • Increases accuracy of cost estimates: Cost of Goods Purchased allows businesses to accurately estimate the cost of their inventory and ensure that costs are accurate and up-to-date.

Limitations of Cost of goods purchased

The cost of goods purchased can be limited in many ways. Some of these limitations include:

  • The cost of goods purchased does not include the cost of goods that are returned by customers or not sold.
  • The cost of goods purchased does not include the cost of goods that have been damaged or lost in transit.
  • The cost of goods purchased does not include the cost of goods that are sold below cost.
  • The cost of goods purchased does not include any overhead expenses such as marketing, advertising, or shipping.
  • The cost of goods purchased does not include the cost of goods that are modified or improved upon after the initial purchase.
  • The cost of goods purchased does not include the cost of goods that are resold or traded in after the initial purchase.
  • The cost of goods purchased does not include the cost of goods that are sold in bulk or discounted.
  • The cost of goods purchased does not include the cost of goods that are sold to other countries or jurisdictions with different taxes or duties.

Other approaches related to Cost of goods purchased

The Cost of Goods Purchased is a measure of the cost of goods acquired in order to generate revenue. Here are some other approaches related to this cost:

  • Cost of Goods Available for Sale - This is the cost of all inventory available for sale during the period.
  • Cost of Goods Sold - This is the cost of inventory sold during the period.
  • Cost of Inventory on Hand - This is the cost of the inventory that is still on hand after the period.

In summary, the Cost of Goods Purchased is a key measure of the cost of goods acquired in order to generate revenue and there are several related approaches to this cost.


Cost of goods purchased — recommended articles
Landed cost — Net purchases — Freight out — Cost element — Inventory value — Segment margin — Inventory accounting — Sales history — Operating cycle

References

Footnotes

  1. ↑ Hinkelman E.G., (2008)
  2. ↑ Callahan K.R, Stetz G.S, Brooks L.M (2011)
  3. ↑ Kamthekar P.D. (2018)
  4. ↑ Chatterjee B.D. (2019)
  5. ↑ Dutta M. (2004)
  6. ↑ Stanford-Smith B., Kidd P.T. (2000)

Author: Aldona Pająk

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