Total Purchase Value of Inventory is the sum-total amount you paid your suppliers to purchase the inventory or raw materials in this period.Īdditional Direct Costs are the costs you incurred over and above what you paid to the suppliers to get your product ready for sale.

The opening and closing value will depend on the type of inventory valuation method you use. Typically this would be a month, or a quarter, or a year, but it could be any period you choose.īeginning Inventory Value is the total stock level at the start of the period you have selected.Įnding Inventory Value is the total stock level at the end of the period you have selected. Period or Accounting Period is the duration or period for which you want to calculate the Cost of Goods Sold. Here is an explanation of the various items in the formula. Cost of Goods Sold FormulaĬost of Goods Sold = (Beginning Inventory Value - Ending Inventory Value) + Total Inventory Purchases + Any additional Direct Costs The cost of goods sold is deducted from the total sales amounts to calculate gross profit.ĬOGS also appears in, and impacts your income statement, and hence overall profitability. It mainly comprises direct expenses incurred in making the finished product or getting it to your customer. However, COGS doesn't include all the costs incurred while running the business.

What is Cost of Goods Sold (COGS)Ĭost of Goods Sold (COGS) calculates the total cost incurred in getting the product ready for sale in the market. Let us first look at the accepted definition of COGS. You can quickly find out the overall inventory levels at any point in time, the total amount you have spent procuring all the stock for a particular item, and know how much you spent processing, shipping, or manufacturing the entire inventory.Īs we shall see later, this aggregate information is used in the formula for calculating the Cost of Goods Sold for both manufactured items and traded items and is a lot easier to work with. It is a lot easier to work with aggregate numbers. Knowing and using the formula makes it easy for you to get the correct cost numbers without doing a manual calculation for each item purchased. This is why you need the formula to calculate COGS. Remembering or finding out the costs associated with every stock item in your warehouse would be difficult and, might I add, a waste of your time. These costs could be different for each item in your inventory. And there is no way you'd remember what that specific price was.Īlso, procuring or manufacturing the items & goods would incur additional costs, e.g., shipping, freight, labor, processing, duty, and handling costs. The last item you sold may have been purchased at a different price than the other stock for the same product six months ago. This is the basis of inventory management. So inventory is either being procured, processed, or being shipped out.

To answer this, let's see how a business like yours might be managing goods & inventory in real life.Ī trading company would procure the required stock from a few trusted suppliers and then ship it to interested buyers.Ī manufacturing company would procure the raw materials from their suppliers before processing the individual items to create their end product. Why can't you just look up the last vendor bill and check the purchase price? Why You Need to Calculate Cost of Goods Sold To know this number, though, you'd need to know the Cost of Goods Sold formula.īut before we jump into formulas and calculations, here is a question for you. How do you know your business is not bleeding money when you make a sale? One way is to ensure that the selling price is more than the cost of the goods sold, aka COGS.

Define cogs accounting