Calculating the cost of goods sold gives accountants and managers an accurate estimation of a company's costs.In cases where companies make products directly from the purchased raw materials, COGS takes into account the specific cost of inventory materials.In order to be in compliance, a company needs to pick one method and use it consistently.If you want to learn how to calculate COGS for a business, keep reading.
Step 1: You can find the average cost of purchased inventory.
Average cost is an acceptable method of reporting and can be used to think about the products in your inventory over a longer period of time.Divide the average cost by the number of products purchased to get it.The average cost is $1.25.
Step 2: You can find the average cost of the goods you made.
This process will require some subjective judgement if your company purchases raw materials and then makes its own inventory.There is a time period and a number of inventory units produced.Add the total cost of both the materials and the labor used to make the product.Divide by the total inventory units produced.As there are regulations governing how to compute inventory cost of produced goods, you should always be certain that you are following the appropriate laws and regulations.The cost may change with the same product over time.
Step 3: You should take a physical inventory count.
The amount of inventory on hand at the start and end of the date should be noted.Take the average cost and divide it by the difference between the beginning and ending inventory.
Step 4: The average cost can be used to calculate COGS.
The total amount of money spent is $25.The total COGS under this method is $18.75 with 15 widgets sold.The average cost method is used by companies when their products are indistinguishable from each other, such as minerals, oil and gas.The Average Cost Reporting Method is used by most companies to calculate the average cost of goods.
Step 5: Pick a beginning and ending date.
It is an alternate method to account for inventory costs.The first thing to do to calculate COGS is to take a physical inventory count at the start and end of the day.It is important that the counts are accurate.Each type of material needs a different part number.
Step 6: You can find the cost of the goods.
The invoices are sent by the vendors.The costs may be different even if it is the same inventory.For a better understanding of how values are affected, count the ending inventory value.The first goods produced or purchased will be assumed to be the first sold.On Monday and Friday, you can stock your inventory with 10 widgets for $1 each, and another 10 for $1.50.If your ending inventory shows you sold 15 widgets by Saturday, that's right.
Step 7: You can calculate COGS.
Begin by subtracting the quantities sold from your inventory.Then take the purchase cost and divide it by them.10 x $1 is $10 plus 5 x $1.50 is $7.50 for a total of $17.50.When inventory costs go up, your profit goes up and your COGS goes down.If both inventory are sold to the consumer at the same price, your earlier inventory cost less than the inventory acquired later in the week.You need a strong balance sheet to impress investors or get a bank loan if the cost of your inventory tends to increase over time.The value of your remaining inventory will go up.
Step 8: Sort by the most recent purchases.
The most recent inventory acquisitions will be the first sold under the FILO method.At the beginning and end of the period, you will need to do an inventory count.
Step 9: You can find out the cost of the goods.
The invoices were sent by the vendors.The costs may be different even if it is the same inventory.Imagine you had 10 widgets for $1 each on Monday and another 10 for $1.50 on Friday.You sold 15 of them by Saturday.
Step 10: Take the cost of the goods you sold into account.
COGS would be all 10 of the widgets that were purchased at $1.50 each.5 of the widgets were purchased for $1 each and sold last for a total of $20COGS will be $5 when the remaining inventory is sold.The FILO method is used when large inventories are carrying increasing costs.This method can result in lower profits.