Question

Define Cost of Merchandise Sold in the context of an example of a business. In other words, define it by illustrating it as it pertains to a business you have chosen. . How can management decisions in this area affect the bottom line profitability of that business? (Your answer should be specific to the business you have chosen) What factors are controllable? Uncontrollable? -Again, make your answer specific to the example you described.

Answer 1

Hey !

Answer is as under :-

Cost of Merchandise Sold is also known as cost of goods sold sold by a merchant. Cost of goods sold is a major item to be deducted from sales to get gross profitability of the concern.

In Accounting terminology Cost of goods sold can be calculated by : beginning inventory + purchases made during the year + direct expenses related to purchase of goods - ending inventory.

Let us take an example of a concern which is engaged in doing wholesale business of wheat grains bags.

Suppose the concern is having a beginning inventory of 1200 bags at the rate $10 per bag.Purchases made during the year is 6000 bags at the rate $11 per bag. 2200 bags are in ending inventory at the rate of $11 per bag. The company sold 5000 bags for the price of $14 per bag. There are some direct expenses like wages $3200 and carriage inwards $4500.

Cost of goods sold =

Beginning inventory	$12000 (1200×$10)
Purchases	$66000 (6000×$11)
Less:ending inventory	($24200) (2200×11)
Wages	$3200
Carriage inwards	$4500
Cost of Goods Sold	$61500

Gross profit = sales - cost of goods sold

70000 - 61500 = 8500 gross profit.

Lets discuss bottom line profitability.

Bottom Line Profitability is the net profit of the business. Subtracting indirect expenses from gross profit is the net profit.

Management decision in this area is having a direct impact over the profitability of the concern. Suppose management purchased goods at high prices, sold at regular prices, which results in low gross profits. Selling prices decided by the management may be low which generates low gross profit. Excess of wastage of grains due to not proper care of management affects the gross profit aversely. Heavy discounts allowed.

Controllable Factors :

Wastage can be controlled by implementing proper storage of wheat grains. Time to time check should be there and over their quality.

Deciding a fixed rate of wages.

Purchasing in bulk so that purchase price may be less charged by the supplier.

Purchasing is big size lots to avoid recurring of carriage inwards.

No discounts are allowed by the management.

Uncontrollable Factors :

Market price of wheat is not in control of management while making purchasing of goods. High prices needed to paid during times of shortage of supply.

Normal loss related to wheat grains cannot be eliminated even by taking special measures.

Fuel cost of transportation is not in control of management.

Fall in selling price of wheat is not a factor that can be controlled by the management. Concern has to sell goods at lower prices if price falls.

All the above stated factors affects the Cost of Goods Sold by a significant amount and having a direct impact over the gross profitability of the concern.