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How do we calculate Cost of Goods in the Income Statement? |
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The Material Cost and Labor cost values noted on page 4 of the FastTrack is as of December of that year. The material costs are not exactly the same as the values on page 4 due to things like:
- If a product is coming out of R&D. The old product may have a lower material cost (due to improvements).
- Or even if there weren't any changes made to the product at a given year, due to the market segment drift, the material costs will be higher in January than it is in December.
Having said that, now we need to put sales on inventoried products into the mix. Generally Accepted Accounting Practices say that the costs of a sale are recognized at the time of the sale. So inventory that is not sold will not be factored into the Cost of Goods for that Round/Year. When inventory is sold the Cost of Good (COG) for the product is determined by the average of Cost of Good in inventory at that moment, instead of Last In First Out (LIFO) or First In First Out (FIFO).
Calculating COG from page 4 of The Foundation® FastTrack will not give a true value.
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