I have a doubt in the following equation:
COGS = Beginning inventory + Purchases - Ending inventory
COGS includes material costs and conversion costs (such as labor, power, etc.). I am not able to understand where are the conversion costs (of the goods sold in a year) in the RHS of the above equation. I think the term (Beginning inventory - Ending inventory) is added to adjust the purchases with the excess/short inventory sold when compared with the purchases. "Ending inventory" and "Beginning inventory" do not accumulate the conversion costs for the goods sold in the entire year. So, where are the conversion costs in the RHS of the equation?
Example to highlight my doubt - Let's assume in a given year, the level of the inventory does not change i.e. Beginning inventory = Ending inventory. Here, COGS = Purchases. I think in the RHS, "Purchases" only includes material costs. Where are the conversion costs (of the goods sold in a year) in the RHS of the equation?
CAclubindia
