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What is the cost of goods sold formula? Here's our detailed guide!

Cost of Goods Sold


The term ‘cost of goods sold formula’ relates to the cost related to the production of the goods sold by a company.


The cost is related to the materials and labor associated with that item for a specific period.


If you are a company that sells products, you are required to know the cost of these products. This is where the COGS formula comes in and takes center stage! The cost of goods sold formula doesn't only calculate the cost of producing an item, but it also reveals profits for an accounting period. This means the formula points out if you are required to make any price changes or if you need to cut down on production costs.


Whether you are a business owner or buyer, knowing how to calculate the cost of goods sold is essential. A better understanding can help you decide about the item you are purchasing or producing.


What is the cost of goods sold?


COGS relates to the amount required to produce goods sold by a company. This money involves the cost of materials and labor that comes with that product. However, it doesn't include indirect expenses such as distribution and sales force costs.



Cogs Formula



What is the cost of goods sold formula?


When you are selling a product, you are required to know the production cost linked with it in a certain period. This could be a month, year, or quarter. You can calculate it with the help of the cost goods sold formula.


The formula is a straightforward calculation that accounts for beginning and ending inventory, and purchases are made during that time. A simple breakdown of the cost of goods sold formula is mentioned as follows:


COGS= (starting inventory) + (purchases made during the period) – (ending inventory)



How Can U Calculate Cogs Formula



How can you calculate the costs of goods sold formula?


When you have to calculate the cost of goods sold, you are required to know the value of starting inventory. The beginning or starting inventory relates to your merchandise, which involves raw materials and supplies.


For instance, at the beginning of your accounting period, you add in the new inventory purchased and subtract it from the ending inventory. Ending inventory means the inventory left during your accounting period. This is how you estimated the cost of goods sold.


The total cost of goods sold formula also accounts for returns, allowances, discounts, and freight charges. However, for now, we are sticking to the basics.


For understanding, take one step at a time. Understand the formula and learn to estimate the cost of goods sold. Here is how you can do it:


1. Point out direct and indirect prices:


If you manufacture or resell items, the COGS formula helps you deduct all the prices linked with it. The first step in it is to separate the direct costs which are involved in the calculation. Differentiate it from the indirect costs that aren’t included in it.


Direct cost:

This relates to the cost linked or associated with the production or purchase of a product. These prices vary depending on the production level. Some of the examples listed as follows are:


  • Direct labor
  • Direct material
  • Manufacturing supplies
  • Fuel consumption
  • Power consumption
  • Production staff wages

Indirect costs:

Indirect costs go beyond the product price of an item. It includes the cost of maintaining and running the money. It might include fixed direct costs, such as rent, and other fluctuating amounts such as electricity. Indirect costs aren't included in the cost of goods sold formula. Some of the examples listed as follows are:


  • Utilities
  • Marketing campaigns
  • Office supplies
  • Accounting and payroll services
  • Employee benefits
  • Insurance cost

2. Recognize beginning inventory:


The next step is to identify the beginning inventory. It relates to the inventory amount left from the last time. This can be a month or a year. It is your merchandise and involves raw materials, supplies, and finished and unfinished items that weren't bought before.


However, it is essential to keep in mind that the beginning inventory equals the ending inventory from the last period.


3. Total up the products added to your inventory:


Once you have determined your starting inventory, you also have to record inventory purchases throughout the time too. It is essential to maintain a record of things, including the cost of shipment and manufacturing for each item, which adds up to the inventory cost.


4. Conclude ending inventory:


The ending inventory relates to the amount of merchandise left at the time. It is calculated by opting for the physical inventory of items or estimating an amount. Often the cost of ending inventory is decreased when the item is damaged, obsolete, or worthless.


5. Put it in the cost of goods sold formula:


Now that you have everything, it’s time to put the value in the formula for an estimated cost of goods sold.


A COGS formula gross profit example:


For example, if you have to calculate the estimated cost of goods sold in a month and have a beginning inventory of $30,000. Through the period, you purchase an extra $5000 inventory. After taking the inventory, you find out that there is $2000 inventory left at the end of the month.


Putting the values in the cost of goods sold formula equation, you will discover the cost of goods sold is $33 000.


COGS= (starting inventory) + (purchases made during the period) – (ending inventory)


COGS= $30,000+$5000-$2000=$33,000.


Another example related to COGS is that a website sells jewelry. In order to find the estimated cost of goods sold, a company must know about beginning inventory. Next, the cost of manufacturing the item through the year is added to the beginning inventory. At last, the business inventory value is subtracted from the beginning value and its cost. This will provide an estimated cost of goods sold in a year.


Companies that sell inventory need to know about the cost that comes with creating products. This is where the cost of goods sold (formula) comes in! The COGS formula gross profit will be shown in the company's profit and loss sheet. It is also crucial for tax filings.


Besides, COGS formula, it is essential for you to learn about retail point of sale system.


Why you can contact Asaan retail for order management?


For your order management, accounting management, reporting, and other features you can sign at Asaan retail software. Asaan retail helps you to manage your business efficiently, and gives your business a boost. The order management feature helps you to find all order from Shopify, Woocommerce, and Daraz instantly to a place.


Further, this feature helps you to built-in point of sales system, and helps you to book orders with shipping carriers of Pakistan. It also offers seamless inventory synchronization across marketplaces and websites.


The Asaan retail software is accessible at any time of the day. User guides are also up on the website for assistance. Further, a free trial for 15 days is up on the website; sign up now!

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Kamil Riaz Kara

14303

Kamil Riaz Kara is an SEO Specialist by profession and a vlogger associated with Digital Marketing since 2015. He has completed his Masters in Administrative Science from the University of Karachi. As a writer, he has written numerous articles on Technology, Marketing and SEO.

Kamil Riaz Kara

14303

Kamil Riaz Kara is an SEO Specialist by profession and a vlogger associated with Digital Marketing since 2015. He has completed his Masters in Administrative Science from the University of Karachi. As a writer, he has written numerous articles on Technology, Marketing and SEO.

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