How to Calculate the Cost of Goods Sold for Your Business Using Inventory Records

How to Calculate the Cost of Goods Sold for Your Business Using Inventory Records

As a business owner, it’s essential to calculate the cost of goods sold (COGS) to determine your company’s profitability. Put simply, COGS is the cost of producing the goods sold in a given period, and it’s calculated by adding all the direct expenses incurred in making a product.

Why is it important to calculate COGS?

Calculating COGS is critical for several reasons:

• It helps you determine your gross profit margin.
• It provides insight into your business’s efficiency and profitability.
• It helps with tax planning and compliance.
• It’s required for financial statements and reports.

How to calculate COGS using inventory records

To calculate COGS using inventory records, you need to follow these steps:

1. Calculate the beginning inventory. This is the value of the inventory you had at the start of the period.
2. Calculate the purchases made during the period. This is the cost of all the goods purchased during the period, including freight, taxes, and other associated costs.
3. Calculate the ending inventory. This is the value of your remaining inventory at the end of the period.
4. Calculate the cost of goods sold. This is the cost of all the goods sold during the period and can be calculated using the following formula: Beginning Inventory + Purchases – Ending Inventory = COGS.

Examples

Let’s consider an example to better understand how to calculate COGS using inventory records.

Suppose your beginning inventory for the period is $10,000, and you made purchases worth $20,000. At the end of the period, your ending inventory was valued at $12,000. Using the formula above, your COGS would be calculated as follows:

$10,000 + $20,000 – $12,000 = $18,000

This means that your cost of goods sold for the period was $18,000.

Conclusion

Calculating the cost of goods sold is crucial for any business. By using inventory records and following the simple steps outlined above, you can accurately determine your COGS and gain valuable insights into your business’s financial performance. Remember to update your inventory records regularly to ensure the accuracy of your calculations.

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