Calculating Cost of Goods Sold

Each month, part of completing the accounting cycle includes calculating the cost of goods sold to arrive at the company gross profit. Cost of goods sold is reflected on the company balance sheet. Actual calculations will vary depending on whether a company is manufacturing a single product or multiple products or just redistributing products. Investigating cost variations from one month to another can help management improve efficiency and control product costs.

Difficulty: Moderately Challenging

Instructions

1. Find your beginning inventory for the month you are calculating. This will be the same number as the ending inventory from the previous month. You should be able to find this number on last month’s balance sheet.

2. Add the cost of direct material purchases made during the month to the beginning inventory number. These are materials used in the production of your product. If you distribute products already manufactured, then this number will be the cost of those products to be redistributed. Do not include office supplies in this number, as those are indirect expenses.

3. Add the cost of direct labor used for the month in manufacturing the goods. In a manufacturing process, the direct labor includes workers running manufacturing equipment and their direct supervisors. The total cost of direct labor includes the wages paid, employer taxes such as social security, and any benefits paid by the company for these employees.

4. Calculate the subtotal of the beginning inventory plus cost of direct materials purchased, plus the cost of direct labor. This number is the total goods available for sale during the month.

5. Subtract the ending inventory value for the month from the subtotal you just calculated. The subtotal was the total goods available for sale during the month. This number, after subtracting, is your cost of goods sold. Remember this includes only direct cost of the goods manufactured. You have not allocated any of the indirect expenses required to run your business or sell your products.

Tips & Warnings

• If your company manufactures multiple products, you will need to calculate individual cost by product. Then multiply each individual cost by the total sales for each product for the month. When you have the total sales for each product calculated, add them together for total cost of goods sold.
• Double check your calculations and formulas before submitting final documents.
• Periodically check your bill of material for each manufactured product, as changes made are not always reported to accounting.

Resources

• Cost of Goods Sold Wiki
• Is Your Business Running Efficiently?

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