Stock doesn't magically appear on retailers’ shelves and appliances don't fix themselves either. Whether goods need to be purchased or service work needs to be done, all of it costs the business. Purchase orders need to be written and employees need to be paid. This adds up as Cost of Goods Sold or Cost of Sales. To calculate the gross margin, the Cost of Goods Sold is subtracted from sales.
For example…
Consider an office supplies business, Love Offices. They would need to purchase stationary, hardware like printers, photocopiers and office furniture. Further to this, they may also provide services like laminating, printing and binding. So, they will need to purchase all this stock and furnish equipment and assign employees to perform the services. Let’s say in the beginning inventory, stock and services cost $500,000. They then purchase $400,000 worth of goods. In the ending inventory, they have $300,000. So, the total Cost of Goods Sold for Love Offices will be $500,000 plus 400,000, minus $300,000, which is $600,000.
