Business

Effect of Increasing the Cost of Goods Sold on the Gross Profit of the Firm

Several businesses around the world should produce a profit to go to certain defunct. It generates effective control necessary in order to ensure that the business still has the money that is available in the hand of the business after paying all dues and business obligations. On the whole of the universe cost of goods sold is also referred to as the cost of sales, among all the expenses incurred by the firm during the year cost of goods sold is the largest amount expense which incurs during a certain year. Cost of goods sold is the accumulated cost that is utilized by the firm to form a product or service. These cost incurred by the firm in three main heads of the cost that is Direct Material, Direct Labor and Manufacturing Overhead. The cost of goods sold also put some considerable effects on the gross profit of the firm. These are considered as the main heads of accounting, accounting is an art of recording, classifying and summarizing of business transactions which are of financial character in a signified manner and to interpret the result thereof. In given below the effects of cost of goods sold on the gross profit of the firm are explaining.

Analysis

If the cost of goods sold if the firm increases so because of it the gross profit of the firm will automatically decrease. Gross profit is the profit generated by the firm from its sales after paying the cost of goods sold. The cost of goods sold is the cost of good that a retailer or the manufacturer of the product has already sold in the market to make a profit and to satisfy the needs of the customers. The cost of goods sold and the net profit both are the parts of the income statement and shows in the income statement of the firm. In essence, the cost of goods sold is being harmonized with the revenues made by the firm during a certain year. Thus, attaining the matching principle concept of the accounting standards as described in the International Accounting Standard (IAS 1) which is also referred to as the General Framework of Accounting.

Cost of goods sold includes opening inventory, cost of goods manufactured and cost of ending inventory. All these items put effects on the cost of goods sold amount. If any of these accounts increases or decreases with a minor proportion or with the larger proportion so definitely due to it the cost of goods sold of the firm will definitely hit. If we focus our topic and try to debate on it so, we can say that if the cost of goods sold increases so the profitability or the net profit of the business entity will decrease. In other words, it can be said that there is a negative effect between the net profit of the firm and the cost of goods sold by the firm.

Conclusion

Conclusively it can be said that the cost of goods sold put effects on the gross profit of the firm. There is a negative effects cost of goods sold on the gross profit of the firm. It simply means that if the cost of goods sold by the firm will increase so because of it the gross profit of the firm will ultimately decrease. Every firm all over the world remains busy in getting control over its cost of goods sold because they exactly know that if they become successful in controlling the cost of goods sold the gross profit will ultimately be increased.

Recommendations

If the firm wants to reduce its cost of goods sold so it is necessary for the firm that it should need to put pressure on its sales team and increase its sales target. The increase in sales will help the firm to bring a sharp decline in the cost of goods sold by the firm and sharp increase in gross profit of the firm which always remains favorable for the firm. Another strategy that the businesses should need to follow in order to decrease its cost of goods sold is that the firm should need to make heavy investments in the sales-generating tools instead of making investments in many other sundry expenses. Another way to decrease the cost of sales is that the firm should move towards direct and social media marketing instead of print media marketing. If the firm hires competent and skilled staff at cheap salaries and low perks and benefits so it will also help the firm to increase the gross profit. Another way to decrease the cost of sales and an increase in the net profit of the firm is that the firm should need to invest in cost-saving technology. By doing so the manufacturing cost of the firm will decrease which automatically leads the net profit of the firm on moving towards the increasing trend? Another way to decrease the cost of sales of the firm is to hire the employees on low salaries and fringe benefits it is one of the most effectual ways through which the firm can decrease its cost of sales and increase its net profits over the period of a specific time.

Author Bio:

This article is written by Ellie Singh. She has been serving his valuable services on the role of Head of Conversation Marketing at The Great Marketing Agency. Besides it, she also works for several freelance content writing firms and writes blogs, guest post, threads, and research articles for them. She also likes to help those students who need help in assignment writing. If anyone come to her and say sis can you help me to write my assignment? She provides them top-notch assignment writing services at a very nominal and reasonable price.

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