For instance, Shane can list the costs for each of his product categories and compare them with the sales. This information will not only help Shane plan out purchasing for the next year, it will also help him evaluate his costs. Here is how to find cost of goods sold for Shane’s Sports.Īs you can see, Shane sold merchandise costing him $515,000 during the year leaving him with only $35,000 worth of product on December 31. Shane is finishing his year-end accounting and calculated the following inventory numbers: Shane specializes in sportswear and other outdoor gear and requires a good supply of inventory to sell during the holiday seasons.

Shane’s Sports is a clothing and apparel retailer with three different locations. It’s a little confusing, but it makes sense when you think of the concept as a whole. Thus, we have to subtract out the ending inventory to leave only the inventory that was sold. We only want to look at the cost of the inventory sold during the period. This gives us the total cost of all inventory, but we can’t stop there. We then add any new inventory that was purchased during the period. Remember, we want to calculate the cost of the merchandise that was sold during the year, so we have to start with our beginning inventory. The cost of goods sold equation might seem a little strange at first, but it makes sense. The cost of goods sold formula is calculated by adding purchases for the period to the beginning inventory and subtracting the ending inventory for the period. Let’s take a look at how to calculate cost of goods sold. COGS is then subtracted from the total revenue to arrive at the gross margin. Creditors and investors also use cost of goods sold to calculate the gross margin of the business and analyze what percentage of revenues is available to cover operating expenses.īoth manufacturers and retailers list cost of good sold on the income statement as an expense directly after the total revenues for the period. The COGS formula is particularly important for management because it helps them analyze how well purchasing and payroll costs are being controlled. The purpose of the COGS calculation is to measure the true cost of producing merchandise that customers purchased for the year.

It only includes direct costs for the merchandise that was sold. Notice that this number does not include the indirect costs or expenses incurred to make the products that were not actually sold by year-end. Calculating COGS using a Perpetual Inventory System.Calculating COGS using a Periodic Inventory System.How is Cost of Goods Sold Affected by Inventory Costing Methods?.

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