# How do you calculate the cost of goods sold for a bakery?

## Brief introduction

Bakery businesses are usually operating in retail outlets. All the baked items and food prepared in the bakery is a product of this business, the preparation of the product requires direct material such as baking powder, baking soda, flour, sugar, milk, butter, salt, and other necessary items, direct labor which is directly involved in the preparation of the product as well as all the necessary overheads involved in the production process of the baking industry.

As the bakery business mostly includes in a small business or owner-managed entity thus care should be taken to the proper allocation of the cost of goods sold items and also minimize this cost in order to run a business as a most profitable business.

## Calculation of cost of goods sold for a bakery

For the calculation of the cost of goods sold from a bakery business, the same formula would be used. Additions of all the purchases during the period should be added in opening inventory counted at the beginning of the period or at the end of the previous period in order to get the total purchases.

Then exclude the value of closing inventory counted at the end of the current period from the total purchase amount in order to reach the cost of goods sold amount.

## Costs that cannot be included as the cost of goods sold

The cost of sales should only include the cost of direct material required to make the products, direct labor involved directly in the preparation of the products, and also the necessary overheads required to complete the production process.

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Thus the cost of goods sold should not include the indirect cost of any nature, it must be deducted from the gross profit amount in order to get the net profit amount.

This net profit amount is the profitability of the business for the period and the undistributed portion of this figure ultimately goes to the retained profit on the face of the balance sheet.

### Nature of cost of goods sold for bakery

The main ingredients of cost of sales include numerous food items such as baking powder, baking soda, butter, corn starch, eggs, flour, milk, salt, fresh fruits as well as dry fruit items.

### Information for decision making

The cost of goods sold is an important factor in order to judge the potential profitability of the business organization whatever is the size of the organization. It is even more important for smaller businesses such as bakery because of incomplete organizational structure.

Most of the calculations are done by the bakers on a manual basis such as on a piece of paper, the automation and installation of modern software will ease the doing of business more comfortably and in a proper manner.

The bakery industry is in its growing phase in the developing world however it became a proper industry in the developed countries of the world. There are many countries in the world such as underdeveloped countries where the concept of the baking industry is yet to prevail.

### Taxes on baking items

Sales tax on baking products is levied by almost every country by its taxation authorities. The bakery industry is fully integrated with the software of taxation authorities of developed countries in order to get real-time access to such retail stores however it is still a challenging task for developing countries as well as underdeveloped countries.

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This results in a loss of a hefty amount of revenue portion by the taxation authorities, so a step should be taken in order to integrate the retailer business with the system of revenue authorities.

### Impact on the financial statements

The main cost of the bakery industry is usually the cost of goods sold amount however the other cost is the very minimal amount as compared to this cost.

Thus the profitability of the baking industry can easily be enhanced by controlling the cost of goods sold mount as well as avoiding the abnormal loss in the production process. The abnormal loss may be a huge amount if not properly trained staff are involved in the production process of the baking industry.

## Conclusion

The conclusion of the above all discussion is that the bakery industry requires a very strict regulation on the control of abnormal losses that may incur in the production process.

This requires the proper training of staff involved in the process who can try to minimize all types of cost of sales as well as the production of baking items as per the required quantity only.