The cost of goods sold is an adjustment to income. It is used when a business has an inventory or produces a product. The cost of goods sold is the beginning inventory + purchases + labor + overhead + materials and supplies (used in the actual production or process) – ending inventory.
Beginning Inventory – This should be the same as last year’s ending inventory.
Purchases – Completed products or raw materials for manufacturing, merchandising, or mining; plus, the cost of shipping; minus the cost of items for personal use.
Cost of Labor – The cost of labor used in the actual production of the goods.
Materials and Supplies – The materials used in the actual production or processing of the goods or for the packaging for sale (e.g., boxes and bags).
Other Costs – A proportion of overhead expenses related to creating a product, freight-in, and containers and packages.
Ending Inventory – This is the physical counted inventory at the end of the tax year and is used as the beginning inventory for the next year’s return.