Cost of goods sold for hospitals – Explained

Hospitals Business model

Hospitals are based on service models rather than manufacturing. The hospital business prioritizes providing quality services.

Hospitals are basic healthcare service providers with varieties of trained staff and medical equipment and devices to treat ailments and sickness of patients. Hospitals provide two types of services: inpatient and outpatient services.

Patients that require care for more than a day are called “inpatients.” Patients that require care for a shorter period are called “outpatients.” Costing methods shall be devised for various cost pools. It is included as perfecting plans for

  • Hospital services
  • physician services
  • Home Care services
  • Personal Care Home services
  • Pharmaceutical or prescription drugs

There are two ways to approach hospital costs. Under the micro-costing approach, the researcher has to identify and specify all of the resources that are used by individual patients. This type of costing requires detailed knowledge of the treatment and services provided to individual patients.

All of the actual costs of the individual’s treatment and services are assigned to that one case. Under the standard costing approach, the method takes total health care expenditures and divides them by a measure of total services provided (the output) to determine a cost per patient.

Cost of goods sold for Hospitals

The cost of goods sold is the carrying value of goods sold during a particular period. As the hospitals are based on product and service models, COGS also equate to the cost of products and services sold or rendered. The cost of goods sold for hospitals are given below:

Cost of Direct materials

This includes costs related to providing services such as medicines, injectables, and other related drugs used to provide the service of treating the patients.

The cost of direct materials is auxiliary to the cost of direct labor are costs that are directly attributable to patient care. Examples of direct costs include nursing services, drugs, medical supplies, diagnostic imaging, rehabilitation, and food services.

Cost of Direct labor

This includes the cost of maintaining the hospital staff. These basically include the cost of salary of doctors, staff nurses, lab technicians, and support employees providing support to provide the main service of the hospital.

All the salaries and wages of the hospital staff either temporary or permanent shall form part of the cost of direct labor.

Direct expenses

Direct expenses in the hospital consist of maintaining the equipment, maintaining the laboratories, and maintaining the premises.

The direct expenses also include the expenses related to the upkeep of premises. However, it does not include administration and selling, and marketing-related expenditure.

Statement of Cost of Goods sold

Hospitals

ParticularsAmount ($)Amount ($)
Beginning inventory of suppliesX 
+ Purchases (Medicine supplies)X 
-Purchases returnsX 
+ Direct labor (salary, commissions)X 
Cost of goods and services XX
-Ending inventory (X)
Cost of services rendered/ COGS XX

Cost of Goods Sold for a Grocery Store – Explained

Grocery store business Model

Generally, a convenience store or grocery store is a small retail business that stocks a range of everyday items such as coffee, groceries, snack foods, confectionery, soft drinks, tobacco products, over-the-counter drugs, toiletries, newspapers, and magazines.

Grocery stores are popularly called retail stores or convenience stores. Convenience stores make money by buying goods and selling those goods to customers.

Typically, convenience stores sell things such as snacks, soft drinks, car accessories, lottery tickets, tobacco, sometimes alcohol.

Your profit represents the amount of money you have taken in after you have subtracted how much you paid for these goods as well as any operational expenses accrued throughout the month.

Cost of goods sold for a Grocery store

Cost of goods sold refers to direct cost attributable to the production of the goods sold in a company. Simply putting together, it refers to the cost of all the products a grocery store purchases and sells in a given time period.

It is basically the direct materials, direct labor, and direct expenses involved in reselling the products. These are easily traceable costs and can be easily identifiable from the products.

The other costs that cannot be easily traceable and cannot be linked to the product are not associated with being the cost of goods sold.

The COGS for grocery stores remain nearly same unlike other business structures where it changes over time, and the business can witness completely different number when comparing your COGS for one shift to your COGS for an entire year.

Various aspects relating to grocery stores shall be analyzed over time by the business owner as the Cost of inventory changes regularly in the grocery store.

How to Calculate the Cost of Goods Sold for a Grocery store?

The cost of goods sold formula is as follows:

Beginning Inventory + Purchased Inventory – Ending Inventory = Cost of Goods Sold (COGS)

Taking an example. The grocery store of Adams Inc based downtown had $9,000 of opening inventory at the start of the month, including food, drinks, chips, and other materials basically anything and everything it takes to sell to retailers.

Throughout the reporting period, the business ordered $24,000 of additional inventory and ended the month with $6,000 worth of inventory.

Hence,

Beginning Inventory: $9,000

Purchased Inventory: $24,000

Ending Inventory: $6,000

Then, plugging those numbers into the grocery store, cost of goods sold equation, we get this:

Cost of Goods Sold = Beginning Inventory + Purchased Inventory – Ending Inventory

Cost of Goods Sold = $9,000 + $24,000 – $6,000

Cost of Goods Sold = $27,000

In this simple example, cost of goods sold comes at $ 27,000.

Generally, it is observed in the grocery stores, that cost of goods sold shall be limited up to 80-85% of sales at most. This is because of the reason that grocery stores are pure retailers of all the products that large FMCG companies produce and wants to sell.

Cost of goods sold for a food business – Explained

Food Business Model

The cost of food business i.e. restaurant ingredients changes regularly, as the price of produce fluctuates with the seasons and the business finds different sources for essential items. It’s prudent to calculate food costs before the company introduces a menu item, so the company can use this decision to help determine the customer’s price.

The owner of the food business shall research every ingredient that will be going into the dish. The generally used component of the food business is salt, cooking oil, chicken, onions, rice, and flour are used in multiple dishes.

Cost of Goods Sold for Food Business

Cost of goods sold refers to direct cost attributable to the production of the goods sold in a company. Simply putting together, it refers to the cost of all the ingredients a restaurant uses in a given time period. Cost of goods sold refers to the costs involved in making the goods or services that are being sold. It is basically the direct materials, direct labor, and direct expenses involved in making the products.

These are easily traceable costs and can be easily identifiable from looking at the products. The other costs that cannot be easily traceable and cannot be linked to the product are not associated with being the cost of goods sold.

The COGS for food business changes over time, and the business can witness completely different number when comparing your COGS for one shift to your COGS for an entire year. Various aspects relating to food business shall be analyzed over time by the business owner as Cost of ingredients or restaurant inventory for a given amount of time.

This would help the food business to stay lean and keep costs low. While preparing the income statement of the food business, the cost of goods sold is subtracted from gross revenue, as it is money that the business either owns or has already paid. Simply, money attributed to COGS is subtracted from the profit of the business

How to Calculate the Cost of Goods Sold for Food Business?

The cost of goods sold formula is as follows:

Beginning Inventory + Purchased Inventory – Ending Inventory = Cost of Goods Sold (COGS)

Taking an example. The food business i.e. Sinra Restaurant inc had $9,000 of leftover inventory at the start of the month, including food, drinks, spices, and other materials basically anything and everything it takes to get a meal on a plate and a drink in a glass.

Throughout the reporting period, the business ordered $24,000 of additional inventory and ended the month with $6,000 worth of inventory.

Hence,

Beginning Inventory: $9,000

Purchased Inventory: $24,000

Ending Inventory: $6,000

Then, plugging those numbers into the restaurant cost of goods sold equation, we get this:

Cost of Goods Sold = Beginning Inventory + Purchased Inventory – Ending Inventory

Cost of Goods Sold = $9,000 + $24,000 – $6,000

Cost of Goods Sold = $27,000

In this simple example, cost of goods sold comes at $ 27,000.

Generally, it is observed in the food industry that cost of goods sold shall be limited up to 35% of sales at most. However, for the fine dining restaurant business, it would be higher as higher and more expensive food is served in such a business.

Cost of goods sold agriculture company – Explained

The business model of an agricultural company

Agricultural company are set up in traditional manner of growing the agricultural produces and selling them at appropriate margin to the customers. While growing the agricultural produces, the crops are value added by way of direct labor.

The agricultural company may also involve itself in the direct selling of seeds and saplings to direct customers. After growing the saplings for a few weeks, these are readily made available for sale, and after the addition of margin, these are sold to the customers.

Cost of goods sold for the landscaping business

These are also called variable costs. The cost of goods sold is operating expenses directly related to the production of the products i.e. agricultural produce such as vegetables, seeds, and saplings the business sells. COGS should include the cost of labor, inputs, and materials used and the portions of overhead related to production.

Small farms are complicated businesses for COGS calculations since there are few clear distinctions between production, sales, management, etc. The labor cost is generally split between harvesting, selling at the market, and bookkeeping.

However, the cost of harvesting labor is only included in COGS. It becomes difficult to allocate overhead costs between production and other business functions. The various costs in agriculture company are as follows:

Field Costs By acre

These are seasonal costs meaning these are irregular in nature and occur only in particular months of the year preferably before the seeds are harvested:

  • Cost of regular labor as starting seeds, watering, transplanting, staking and weeding
  • Cost of potting soil and trays
  • Cost of seeds
  • Cost of black plastics or amendments

All the above costs are also considered as cost of supplies or cost of direct labor for agriculture company

Field costs by the case

These costs are incurred in each of the vegetable cases wisely. Suppose, the company is growing cauliflower then, the cost would be all those components of the cost that are related to the growth of cauliflower. These are

  • Cost of labor such as harvesting, sorting, and packaging
  • Cost of supplies

Item wise cost of goods sold

Costs of Goods Sold are expenses that are directly attributed to the amount of production. COGS are reported on the Income Statement and are segregated from Operating Expenses, which are expenses that are not directly tied to production. These include:

  • Animal Feed & Minerals Expense
  • Vet & Medical
  • Replacement Animals
  • USDA Processing Cost
  • Packaging

Statement of Cost of Services Rendered

Agricultural Company

ParticularsAmount ($)Amount ($)
Beginning inventory of suppliesX 
+ Purchases (Direct materials)X 
-Purchases returnsX 
+ Direct labor (Cost by field wise either by acre or by each case)X 
Cost of goods and services XX
-Ending inventory (X)
Cost of services rendered/ COGS XX

Knowing COGS is very important to analyze the profitability of the business.  Different products within a farm business have different COGS, and as such, different levels of gross profit. Labor associated with production is added to COGS while linked with marketing and sales is added to operating expenses.

Cost of goods sold vs expenses – Explained

Cost of Goods sold

Cost of goods sold refers to the costs involved in making the goods or services that are being sold. It is basically the direct materials, direct labor, and direct expenses involved in making the products. These are easily traceable costs and can be easily identifiable from looking at the products. The other costs that cannot be easily traceable and cannot be linked to the product are not associated with being the cost of goods sold.

Statement of Cost of goods sold

ParticularsAmount ($)Amount ($)
Beginning inventory of suppliesX 
+ Purchases (supplies)X 
-Purchases returnsX 
+ Direct labor (salary, wages)X 
Cost of goods and services XX
-Ending inventory (X)
Cost of goods sold XX

Expense

As per the expense recognition concept, the expenses shall be recognized in the same period as the revenues to which they relate. Further under accrual method of accounting, the expenses have to be reported in the income statement for the period in which:

  1. The expense best matches the revenue/sales.
  2. The expense is used or expires this period.
  3. There is uncertainty in measuring future benefit of cost.

There are two major classification of expenses as:

  1. Operating expenses: These involve major activity expenses for operating the business. The operating expenses include: cost of goods sold, general and administrative expenses, etc. These expenses can easily be sorted by department and product line.
  2. Non-operating expenses: These expenses relate to incidental activities of the company. Such expense includes interest expense which is not directly related to main activity of business.

Cost of goods sold VS Expenses

The differences between cost of goods sold and expenses are given below:

Basis of differenceCost of goods soldExpenses
MeaningCOGS refer to all the direct costs required in making the products or rendering services.Expenses refer to all those expenditures that occurs during the daily operations of the business.
Production linkedCOGS are directly linked to the production or manufacturing of any finished product.These may or may not be directly linked to the production as it also consists of non-operating expenses.
Subset ofCOGS is subset of expenses.Expenses consist of all the cost related to goods sold.
Disclosure in Financial StatementCOGS falls under debit side of income statement.All the debit side of income statement are expenses.
Accounting standardsCOGS are not defined under any accounting standards.Expenses are defined under accounting standards to include operating and non-operating expenses.
Examples– Direct materials required for the production of goods and services
– Labor tied to production.
– Rent and utilities
– Sales and marketing expenses
– Insurance expenses
Point of originWhen the goods are produced or manufactured, the cost related to goods sold happen.Expenses incur to run daily operations of the business including costs related to production.

Cost of goods sold vs gross revenue – Explained

Cost of Goods sold

Cost of goods sold refers to the costs involved in making the goods or services that are being sold. It is basically the direct materials, direct labor, and direct expenses involved in making the products. These are easily traceable costs and can be easily identifiable from looking at the products. The other costs that cannot be easily traceable and cannot be linked to the product are not associated with being the cost of goods sold.

Statement of Cost of goods sold

ParticularsAmount ($)Amount ($)
Beginning inventory of suppliesX 
+ Purchases (supplies)X 
-Purchases returnsX 
+ Direct labor (salary, wages)X 
Cost of goods and services XX
-Ending inventory (X)
Cost of goods sold XX

Gross revenue

It refers to the total amount of sales recognized for the reporting period before any deductions are made in order to arrive at gross profit. It indicates the capability of the company to make sales in order to generate a profit. When deductions are netted against gross revenue, the aggregate amount would be referred to as net revenue or net sales. When gross revenue is recorded, all income from a sale is accounted for on the income statement.

There is no consideration for any expenditures from any source. Gross revenue is popularly referred to as the top line while net revenue is popularly referred to as the bottom line. Gross revenue is used as a metric and provides a better view of the health of the organization and better comparison among the peer’s companies. Gross revenue is recognized as per revenue recognition concept accounting standards.

Cost of goods sold VS Expenses

The differences between cost of goods sold and expenses are given below:

Basis of differenceCost of goods soldGross revenue
MeaningCOGS refer to all the direct costs required in making the products or rendering services.Gross revenue refers to the total goods and services rendered during the organization.
Production linkedCOGS are directly linked to the production or manufacturing of any finished product.When Profit margin and indirect costs are added to COGS, it becomes gross revenue. The gross revenue is the output of production process.
Subset ofCOGS is subset of expenses.COGS is subtracted from gross revenue to arrive at gross profit.
Disclosure in Financial StatementCOGS falls under debit side of income statement.The credit side of income statement is generally the gross revenue before providing for any expenses.
Accounting standardsCOGS are not defined under any accounting standards.Revenue is recognized as per revenue recognition concept.
Examples– Direct materials required for the production of goods and services
– Labor tied to production.
List of all the goods sold before any sales returns
Point of originWhen the goods are produced or manufactured, the cost related to goods sold happen.When the goods are sold, gross revenue is recognized. Gross revenue is recognized after transfer of ownership which generally happens after completion of delivery of goods or rendering of services.