Applying a COGS formula to determine profitability is useful in evaluating business costing methods. The cost to complete a sale to the customer exceeds the cost of acquiring the product (or materials to make that product). Between the time goods are received and delivery of the product to the customer, the business incurs direct expenses which include cost of raw materials, labor, assets, etc. All these costs should be proportionately added to the cost of each product sold when tracking inventory movement at your business; however, overhead costs are not calculated into COGS.
The Cost of Goods Sold Formula:
Beginning Inventory (inventory at the beginning of the time period) + Purchased Inventory (inventory acquired during the time period) – Ending Inventory (inventory left at the end of the time period) = Cost of Goods Sold
All the above figures in the COGS equation should represent the same time period, i.e., calculate these numbers on a monthly, quarterly, or yearly basis for the same dates. To calculate the cost of goods sold, you will attribute accumulated direct costs with each inventory stage.
SOS Inventory makes it even easier with COGs software functionality built in. The extensive reporting SOS Inventory provides exceeds cost of goods software feature needs.
COGs Formula Example:
here’s an example using the COGS formula (Cost of Goods Sold) for a hypothetical company called “XYZ Electronics.”
XYZ Electronics sells smartphones. Let’s assume the following information:
- Beginning Inventory: $100,000
- Purchases: $400,000 (total cost of new smartphones purchased during the year)
- Ending Inventory: $80,000 (value of unsold smartphones at the end of the year)
- Additional Expenses: $50,000 (other costs associated with the production and sales)
Now, let’s calculate the Cost of Goods Sold (COGS) using the formula:
COGS = Beginning Inventory + Purchases – Ending Inventory + Additional Expenses
COGS = $100,000 + $400,000 – $80,000 + $50,000 COGS = $470,000
So, the Cost of Goods Sold for XYZ Electronics for the year would be $470,000. This represents the total cost of the smartphones sold during the year, including the beginning inventory, new purchases, ending inventory adjustments, and additional production expenses.
A cost of goods sold formula example is as follows:
If the business starts off with 100 units, then buys 50 units and sells 25 units, the cost of goods sold is the cost of 100 units plus the cost of 50 units less the cost of 25 units which equals the cost of 125 units.
In accounting, costs of goods sold reveals the costs associated with generating revenue from a product. These costs will vary from one business to another. If referring to a manufacturer, these costs can include ingredients or parts, labor, assets, storage, and shipping.
Overhead is calculated separately as these costs tend to be regular monthly costs such as rent, electricity, internet service, etc. which have no impact on product volume. COGS is tied directly to inventory quantities and therefore can vary if the costs to sell an individual unit change.
Understanding the actual cost of goods sold allows your business to do a better job of pricing product or staying aware when costs to produce that product change. As sales increase so, too, do the costs of goods sold because costs will continue to be tied to selling those products. Normal accounting practices indicate the accrual of COGS during the same period as when they are sold.
Tracking cost of goods sold, gross profits and revenue available for overhead is simple to do with SOS Inventory. SOS Inventory records inventory costs and quantities at every stage so you can easily generate a report for any product to determine costs for the time period selected.
What’s more, SOS Inventory will update your QuickBooks Online account to ensure your ledger reflects your actual inventory costs on hand, giving you timely information at your fingertips.
No need for manual COGS formula calculations or cross-referencing multiple spreadsheets from different departments. SOS Inventory gives you the information you need to make product pricing decisions or analyze cost fluctuations.