The following is selected information from Mars Corp. Compute cost of goods sold for the month of March.
| | |
| :-------------------- | :------- |
| Mars Corp data | |
| Inventory, March 31 | $401,236 |
| Purchase discounts | 312,890 |
| Purchase returns and allowances | 10,739 |
| Sales | 23,925 |
| Sales discounts | 253,203 |
| Gross purchases | 33,288 |
| | 112,961 |
Answer (1)
Calculate net purchases by subtracting purchase discounts and purchase returns and allowances from gross purchases: $33 , 288 − $312 , 890 − $10 , 739 = − $290 , 341 .
Determine the cost of goods available for sale by adding the beginning inventory to the net purchases: $112 , 961 + ( − $290 , 341 ) = − $177 , 380 .
Compute the cost of goods sold by subtracting the ending inventory from the cost of goods available for sale: − $177 , 380 − $401 , 236 = − $578 , 616 .
The cost of goods sold for March is − $578 , 616 .
Explanation
Understanding the Problem We are given data for Mars Corp for the month of March and asked to compute the cost of goods sold (COGS). We have the following information:
Inventory, March 31 (Ending Inventory): $401,236
Purchase discounts: $312,890
Purchase returns and allowances: $10,739
Sales: $23,925
Sales discounts: $253,203
Gross purchases: $33,288
Inventory, March 1 (Beginning Inventory): $112,961
We will use the following formulas to calculate the cost of goods sold:
Net Purchases = Gross Purchases - Purchase Discounts - Purchase Returns and Allowances
Cost of Goods Available for Sale = Beginning Inventory + Net Purchases
Cost of Goods Sold = Cost of Goods Available for Sale - Ending Inventory
Calculating Net Purchases First, we calculate the net purchases:
Net Purchases = Gross Purchases - Purchase Discounts - Purchase Returns and Allowances Net Purchases = $33,288 - $312,890 - $10,739 Net Purchases = -$290,341
Calculating Cost of Goods Available for Sale Next, we calculate the cost of goods available for sale:
Cost of Goods Available for Sale = Beginning Inventory + Net Purchases Cost of Goods Available for Sale = $112,961 + (- $290,341) Cost of Goods Available for Sale = -$177,380
Calculating Cost of Goods Sold Finally, we calculate the cost of goods sold:
Cost of Goods Sold = Cost of Goods Available for Sale - Ending Inventory Cost of Goods Sold = -$177,380 - $401,236 Cost of Goods Sold = -$578,616
Final Answer The cost of goods sold for the month of March is -$578,616. A negative cost of goods sold is unusual and suggests there might be errors in the data provided, such as misclassification of expenses or incorrect inventory valuation.
Examples
Understanding the cost of goods sold (COGS) is crucial for businesses to assess their profitability and operational efficiency. For instance, a bakery can use COGS to determine the direct costs associated with producing its goods, including ingredients, labor, and packaging. By accurately calculating COGS, the bakery can set appropriate prices, manage expenses, and evaluate the financial impact of changes in production costs or sales volume. This information is vital for making informed business decisions and ensuring long-term financial health.
