How to Calculate the Cost of Goods Available for Sale
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Calculating the cost of goods available for sale (COGS) is a crucial aspect of running a business, as it helps determine the total value of inventory that a company has on hand to offer consumers. Accurate COGS calculation is essential for effective inventory management, pricing decisions, and evaluating overall profitability. In this article, we will explain the steps to calculate the cost of goods available for sale.
1. Determine Beginning Inventory
The first step in calculating COGS is to determine the value of your beginning inventory. This is typically the closing inventory balance from the previous accounting period. You can find this information in your balance sheet or inventory records.
2. Add Purchases
Next, add the total value of all inventory items purchased during the current accounting period. Keep in mind that this figure should include all direct costs relating to these purchases, such as freight charges and import duties. Ensure you exclude any returns or purchase discounts from the total.
3. Cost of Goods Manufactured
If your company produces its own products, you also need to calculate the cost of goods manufactured during the accounting period. This would include direct materials, labor costs, and a share of manufacturing overheads such as utilities or rent expenses allocated to production.
4. Calculate Total Cost of Goods Available for Sale
Now that you have figured out your beginning inventory and added any purchases and cost of goods manufactured, it’s time to determine your total COGS. Simply sum up these values:
Cost of Goods Available for Sale (COGAS) = Beginning Inventory + Purchases + Cost of Goods Manufactured
This will give you an accurate value for how much merchandise you have on hand to sell during this accounting period.
5. Calculate Ending Inventory (optional)
If you want to be more thorough in analyzing your company’s financial performance and operational efficiency, it can be helpful to calculate ending inventory as well. You can do this by counting the actual number of items left in your inventory at the end of the accounting period, then multiplying that quantity by their purchase or production cost.
6. Calculate Cost of Goods Sold (optional)
While calculating COGAS helps you understand the total value of inventory available for sale, determining the cost of goods sold (COGS) can further assist in evaluating profitability. Subtract your ending inventory from your COGAS to calculate COGS:
Cost of Goods Sold (COGS) = Cost of Goods Available for Sale – Ending Inventory
By understanding how to calculate COGAS and optional figures such as ending inventory and COGS, you can make informed decisions about your business’s pricing strategies, inventory management, and operational efficiency. Proper calculation also ensures accurate financial reporting for stakeholders and regulatory compliance.