Question 9 of 26intermediate💡 UnderstandShort Answer3 marks

Explain the concept of cost of goods sold?

Correct Answer

Cost of Goods Sold refers to the total cost incurred to produce or acquire the goods that have been sold during an accounting period.

When there is no opening or closing stock, the cost of goods sold is calculated as the total of purchases and direct expenses. The formula is: Cost of Goods Sold = Purchases + Direct Expenses

However, in practice, there is usually some unsold stock (closing stock) at the end of the accounting period. In such cases, the formula becomes: Cost of Goods Sold = Opening Stock + Purchases + Direct Expenses – Closing Stock

Direct expenses include items like wages and freight inwards that are directly related to the production or acquisition of goods.

Exercise: Questions for Practice - Short Answers | Q: 3 | (Page 34)
For More Understanding

Explanation

The answer draws from the textbook context which explains the concept progressively - first with no opening/closing stock (simple formula: Purchases + Direct Expenses), then introducing closing stock (Purchases + Direct Expenses - Closing Stock), and finally Illustration 5 shows the complete formula with opening stock, purchases, direct expenses (wages and freight inwards), and closing stock. The 3-mark format requires clear definition and formula presentation with key terms highlighted.

Solution Steps

  1. Step 1: Define Cost of Goods Sold as the cost of goods actually sold during the period

  2. Step 2: Present the basic formula (Purchases + Direct Expenses) for when no stock exists

  3. Step 3: Present the complete formula (Opening Stock + Purchases + Direct Expenses - Closing Stock) for practical scenarios with closing stock

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