Business News Daily provides resources, advice and product reviews to drive business growth. Our mission is to equip business owners with the knowledge and confidence to make informed decisions. As part of that, we recommend products and services for their success.<\/p>\n

Analyzing Your Business\u2019s Health<\/h2>\n

Ending inventory costs are usually determined by taking a physical inventory of products or by estimating. The Internal Revenue Service (IRS) requires businesses with inventory to account for it by using the accrual accounting method. You most likely will need a tax professional to calculate COGS for your business income tax return. But you should know the information needed for this calculation, so you can collect all the information to include in this report. Consistently using COGS means using the historical data attained to determine seasonal trends. By using the historical changes, you can identify new opportunities that will drive the growth of your business.<\/p>\n

While there\u2019s only one formula for calculating COGS, companies can choose from several different accounting methods to find their specific cost. Each method is a different way of calculating the cost of the specific items sold in a given period. So, while COGS is an important metric, it\u2019s far from a complete indication of a company\u2019s total cost of doing business. The cost of goods sold is usually separately reported in the income statement, so that the gross margin can also be reported. Analysts like to track the gross margin percentage on a trend line, to see how well a company’s price points and production costs are holding up in comparison to historical results. The following exhibit shows where the cost of goods sold appears in the income statement.<\/p>\n

The company\u2019s COGS for the month is $60,000, representing the cost of materials used to manufacture and sell the furniture. The ending inventory is the value of unsold goods remaining at the end of the period. Businesses usually conduct a physical inventory count or use accounting records to determine this amount.<\/p>\n

Cost of Goods Sold Calculation with the Periodic Inventory System<\/h2>\n

In this case, you might use the special identification method to find your inventory cost, resulting in a highly accurate COGS. This method tends to be used by businesses that sell bespoke or otherwise unique items, such as vehicles, real estate, and art or collectibles. You’ll typically find the cost of goods sold on the line directly underneath total revenue when looking at a company’s income statement. If you subtract the cost of goods sold from total revenue, you’ll get the gross profit figure. You must keep track of the cost of each shipment or the total manufacturing cost of each product you add to inventory. For purchased products, keep the invoices and any other paperwork.<\/p>\n

During periods of rising prices, goods with higher costs are sold first, leading to a higher COGS amount. Your bakery made $6,000 in gross profit before other expenses like rent, utilities, and marketing. The cost of purchasing inventory and manufacturing expenses totaled $30,000 (COGS). In the fast-paced world of c-stores and gas stations, staying on top of how to track COGS in a convenience store can feel like a luxury you don\u2019t have time for.<\/p>\n

But it also helps determine how efficiently you are running your business. These are all questions where the answer is determined by accurately assessing your COGS. Companies that make and sell products or buy and resell goods must calculate COGS to write off the expense. The resulting information will have an impact on the business tax position. When inventory is artificially inflated, COGS will be under-reported which, in turn, will lead to a higher-than-actual gross profit margin, and hence, an inflated net income. LIFO is where the latest goods added to the inventory are sold first.<\/p>\n

To understand the difference between operating expenses and the costs of goods sold, you must take into account how you attribute said costs. It\u2019s the percentage of sales revenue a company retains after incurring all its COGS. It should be noted that the higher the gross margin, the more the amount a business can retain from every dollar of revenue.<\/p>\n

Tools and Software for Calculating COGS<\/h2>\n

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• The cost of sending the cars to dealerships and the cost of the labor used to sell the car would be excluded.<\/li>\n
• Additionally, it is not permitted under International Financial Reporting Standards (IFRS) and is mainly used in the U.S. under Generally Accepted Accounting Principles (GAAP).<\/li>\n
• COGS includes directly used labor and the total costs of the materials used to create products.<\/li>\n
• Likewise, ending inventory reflects the total value of whatever inventory remains unsold at the end of the accounting period, which you will carry over into the next.<\/li>\n
• Levon Kokhlikyan is a Finance Manager and accountant with 18 years of experience in managerial accounting and consolidations.<\/li>\n
• Using a perpetual system, Shane would be able to keep more accurate records of his merchandise and produce an income statement at any point during the period.<\/li>\n<\/ul>\n

  Since we sold all the new laptops, their respective shipping charges are added to the direct cost. Let us calculate the Cost of Goods Sold, or COGS, using the formula we defined above. We will use the same scenario with FIFO and LIFO to understand how COGS changes with the inventory valuation method. If you shipped the items to your warehouse and paid the logistics provider, that is an additional direct cost.<\/p>\n