How to Calculate Shrinkage to Cost of Goods
Shrinkage is the unauthorized removal of items from inventory -- in short, theft from the warehouse. High shrinkage rates present a major problem for a business. One of the first steps to resolving this issue is to determine the actual shrinkage over a period of time, whether a month, a quarter or a year.
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Instructions
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Choose a period for which you want to evaluate shrinkage. You can estimate shrinkage for a day, a week, a month, a quarter, a year or a longer period. The more frequently you suspect shrinkage occurs, the more frequently you should evaluate the issue.
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Calculate the ending inventory for the period. The ending inventory formula is the value of beginning inventory for the period, plus the cost of new inventory purchases added to the warehouse, minus the cost of goods sold during the period. For example, assume a beginning inventory of $10,000, new purchases of $1,000 and a value of items sold during the period of $5,000. The ending inventory is $10,000 + $1,000 - $5,000, or $6,000.
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Count actual inventory to calculate shrinkage. A hand count is the only way to accurately determine how much the actual inventory varies from the written or computer calculations. For example, assume that a hand count concludes that you have $4,000 worth of actual inventory in stock.
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Subtract the actual inventory total from the calculated ending inventory. In the example, $6,000 minus $4,000 results in shrinkage of $2,000.
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