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Cost of merchandise sold is an accounting term used primarily by retailers. It refers to the cost a retailer paid for the merchandise it sold in any given time frame. The time frame for the cost of merchandise sold could be one month, 6 months, but no longer than one year.
Cost of merchandise sold is also referred to by many as cost of goods sold. The term cost of merchandise sold was created to distinguish a retailer from a manufacturer. Furthermore, factory overhead and direct labor are included in the cost of goods sold for a manufacturer. Since a retailer purchases finished goods, a manufacturing process including labor and raw materials is unnecessary. As a result, retailers often use the term cost of merchandise sold.
Cost of merchandise sold is achieved by adding the beginning inventory to the merchandise purchased. The resulting figure is called total merchandise available for sale. Then subtract the value of the merchandise on hand or ending merchandise and the resulting figure is the cost of merchandise sold. Below provides a chart so you can easily see the formula or calculation.
Beginning Inventory merchandise $ 40,000
Add: Purchases of merchandise $ 200,000
Equals: Total Merchandise available for sale $ 240,000
Less: Ending Merchandise ($30,000)
Cost of Merchandise Sold $ 210,000
As you can see, the retailer had $40,000 worth of merchandise at the beginning of the fiscal year. $200,000 worth of merchandise was purchased throughout the fiscal year which means $240,000 worth of merchandise was available for sale during the fiscal year. The company then counted its inventory at the end of the fiscal year and determined the value of the unsold merchandise (or ending inventory) amounted to $30,000. The ending merchandise of $30,000 is subtracted from the total merchandise available for sale to get the cost of merchandise sold during the fiscal year.
Below provides a number of common questions retailers have relating to cost of merchandise sold.
Do you include labor in the cost of merchandise sold? Since a retailer buys finished merchandise, meaning the merchandise is immediately ready for sale when it arrives at their place of business, labor costs are not included in the cost of merchandise sold. On the other end of the continuum, a manufacturer of clothing, for instance, would include direct labor in their cost of goods sold. But since retailers buy “finished goods” or “ready for sale” merchandise, neither direct labor nor factory overhead is included in the cost of merchandise sold.
Should shipping costs be included in the cost of merchandise sold? Shipping costs or delivery fees paid by a retailer to ship the merchandise to their place of business are included in the cost of merchandise sold. Furthermore, shipping costs are considered direct costs related to the sale of the merchandise and, therefore, must be included in the cost of merchandise sold.
Are advertising costs included in the cost of merchandise sold? This question is asked quite frequently and with good reason. Cost of merchandise sold deals with direct costs associated with selling a product or merchandise. Since advertising is a cost directly involved in getting customers into your retail outlet to buy products, many feel advertising should be included under the cost of merchandise sold. This is a good point, however, advertising and promotion is an operating expense necessary for all businesses. In addition, each business has the own advertising and promotional objectives, strategies and budget. It is for these reasons that advertising is not part of the cost of merchandise sold.
Does theft of merchandise appear under the cost of merchandise sold? This too is a great question because the cost to purchase the merchandise was actually incurred by the retailer. In short, however, theft is not a cost of merchandise sold since the merchandise was not actually sold; it was stolen. As a result, a theft account is created and appears on the income statement under operating expenses.
Here’s another popular question: Does cost of merchandise sold appear on the balance sheet? No, the cost of merchandise sold appears on the income statement. The unsold merchandise or ending inventory, however, appears on the balance sheet under the current asset section.
If you would like more detailed information on ending inventory or ending merchandise, refer to the discussion on Balance Sheet. For in depth information relating to cost of goods sold and cost of merchandise sold, refer to our discussion on the Income statement.