How to Calculate Cost of Goods Sold

This article will explain how to calculate Cost of Goods Sold or COGS.

Instructions

Difficulty: Moderately Easy

Things You’ll Need:

• Pencil
• Calculator
• Financial records for your company or business.

1. http://www.marketingmo.com The Costs of Goods Sold(COGS) is the expense a company incurred in order to manufacture, create, or sell a product (About.com). This is basically the COST of sells.
2. COGS include but not limited to the following:(for a product based business)
   
   Labor, raw materials, costs associated with shipping & inventory of raw materials, Production facility expenses if the facility is solely for this product (or you can use a percentage), and some companies include allocation for general overhead, customer service, processing, or other items.
3. COGS for a service based business:
   
   Labor, materials, variable costs associated with delivery, and again some companies use general overhead, customer service, processing, or other items.
4. Now to calculate for your merchandising or product based business. Add up all data from above. This is your TOTAL. Now how many units were sold during this period (Month, Qtr, Year, etc.)?? Now divide TOTAL into number of units sold and this is your COGS. The same process goes for the service based business.
5. Take a look at this and use formula below to get an example of COGS. If you have financial records, get them out and take a look at inventory (beginning and ending), sales, and purchases.
6. The formula for calculating COGS is:
   
   Beginning Inventory + Net purchases + Freight In - Ending Inventory.
7. Now, beginning inventory is just that, what you started with on a particular date in monetary value.
   
   Net purchases = Purchases - Purchase returns and allowances - purchase discounts.
   
   Purchase Returns and Allowances or PRA is returns of merchandise and store credits or allowances. Purchase Discounts are discounts given on sold merchandise.
8. Compute Goods available for Sale:
   
   Beginning Inventory + Cost of Goods Purchased or Purchases
9. Compute COGS:
   
   Goods available for sale - Ending Inventory
10. Compute Gross Profit:
    
    Net Sales - COGS
11. I HOPE THIS TUTORIAL HELPED SOME.

Tips & Warnings

• Can come in very handy when starting your business!!
• Great for new businesses!!
• Double check with an accountant before submitting books for accuracy!! You would hate to pay the wrong taxes at the end of the year, Qtr, etc.!!
• This may be too confusing for some!!
• May be too much math for some!!