How to Calculate Cost of Goods Sold

Posted by sophiamilller on March 18th, 2013

In case you have thought of founding a business which implies the transfer of ownership of products from your business to the customer, you must take into consideration several aspects before doing this. For instance, you will have to calculate cost of goods sold (COGS). However, not everyone who runs a business has to do such an accounting operation. Companies that are dealing with rentals do not transfer their ownership to the customer; they just lend their products to clients for a certain period of time. In this case, we cannot speak about goods sold, as a consequence, the company is not asked to calculate their cost.

Nevertheless, the great majority of businesses do convey ownership to their clients. To have a clearer idea about this phenomenon, let’s take into consideration a shopkeeper who buys items of clothing and resells them to his every day customers. At their turn, customers do not have to re-resell the clothes either to the shopkeeper or to other people. It is a common thing to do for all customers, both the small ones and the big ones, who want to transfer their ownership to others to calculate cost of goods sold. At the end of every year, each customer must draw a line and see the status of his business. He has to make sure if his business went well or bad during that year, if he sold all the products he was planning to sellor if he hadn’t managed to sell all etc.

If you want to calculate cost of goods sold for your business, you must consider not only the price you paid for your goods, but also the price you paid for shipping your goods. Another aspect that deserves special attention is your status. You can either a manufacturer or a retailer (or a service provider). In each case, the formula is slightly different. If we think about a retailer, his costs come from the prices he paid for the goods and the shipping fees, whereas in the case of the manufacturer, costs regard raw materials, employees, shipping etc.

Another important issue for those who want to become retailers or manufacturers is the ending inventory. Every person who runs a business, either big or small, has to present some reports at the beginning and at the ending of each year. The products that remain unsold at the beginning of every month or every accounting year are considered to be beginning inventory. On the other hand, the goods that remain unsold at the end of every month or year are called ending inventory.

Due to the fact that accounting periods come consequently, the ending inventory of one month or year normally becomes the beginning inventory of the next month/year. When establishing such an issue, businessmen calculate the number of products that remained unsold and multiply them by the price of each unit. The last step regards all expenses that are added to this amount and gives us the result we have expected. As in the case of costs of goods sold, the ending inventory has to be calculated differently for a manufacturer than for a retailer, the former one having to consider about certain variables in establishing the total cost per unit.

These things may sound very easy in theory, but, in practice, they are not at all a piece of cake and should be analyzed very thoroughly.

Have you ever had to calculate cost of goods sold?How many times have you determined the ending inventory for your business?