COGS includes material costs and conversion costs (such as labor, power, etc.). I am not able to understand where are the conversion costs (of the goods sold in a year) in the RHS of the above equation. I think the term (Beginning inventory - Ending inventory) is added to adjust the purchases with the excess/short inventory sold when compared with the purchases. "Ending inventory" and "Beginning inventory" do not accumulate the conversion costs for the goods sold in the entire year. So, where are the conversion costs in the RHS of the equation?
Example to highlight my doubt - Let's assume in a given year, the level of the inventory does not change i.e. Beginning inventory = Ending inventory. Here, COGS = Purchases. I think in the RHS, "Purchases" only includes material costs. Where are the conversion costs (of the goods sold in a year) in the RHS of the equation?
01 May 2015
did you add conversion cost in last FY while you calculated ending inventory? did you add conversion cost in current while you calculated ending inventory valuation for this year? COGM for current year is consumption for current year + conversion cost of this year. if you did all above ur equation will result COGS. if still this is not clarified please post figures so than we can understand ur doubt more clearly
CAclubindia
