Cost Of Goods Sold Formula

For anyone running a business that involves selling products, understanding the Cost of Goods Sold (COGS) is crucial. This key financial metric helps business owners manage inventory, price products correctly, and assess overall profitability. In this article, we will break down the concept of COGS, provide formulas, and offer examples to help you better understand how it works.

How Do You Calculate Cost of Goods Sold?

To calculate COGS, you begin with your beginning inventory, add purchases made during the period, and then subtract your ending inventory.

1. Beginning Inventory
2. Plus: Purchases Made During the Period
3. Minus: Ending Inventory

The simplified formula looks like this:

COGS = Beginning Inventory + Purchases - Ending Inventory

Example:

Suppose at the start of the year, your beginning inventory was $10,000. During the year, you purchased an additional $5,000 worth of goods. At the end of the year, your ending inventory was $2,000. The calculation would be:

COGS = $10,000 + $5,000 - $2,000

COGS = $13,000

What is the Formula for Gross Profit and COGS?

Gross Profit is calculated by subtracting the Cost of Goods Sold from total sales.

1. Gross Profit = Sales - COGS

Example:

If your total sales for the year were $20,000 and your COGS was $13,000, then your Gross Profit would be:

Gross Profit = $20,000 - $13,000

Gross Profit = $7,000

What is an Example of Cost of Goods Sold?

Cost of Goods Sold includes all direct costs tied to the production of goods sold by your business. This might include raw materials, labor, and manufacturing supplies.

Example:

If you sell handmade candles, your COGS might include:

1. Cost of wax
2. Cost of wicks
3. Labor cost to make the candles
4. Packaging cost

However, it wouldn't include the cost of marketing the candles or the rent for retail space, as these are not direct production costs.

What is Not Included in Cost of Goods Sold?

Understanding what is not included in COGS is just as important as knowing what is included. Indirect costs are typically not part of COGS.

1. Administrative Expenses
2. Sales and Marketing Expenses
3. Overhead Costs like Utilities and Rent (if not directly tied to production)
4. Depreciation (unless directly related to manufacturing)

Example:

Using the handmade candles example from above, the cost for the rent of your retail store or the salary of your customer service team would not be included in COGS.

Cost of Goods Sold Formula with Example

Let's go into a step-by-step example using the COGS formula:

1. Beginning Inventory: $5,000
2. Purchases: $12,000
3. Ending Inventory: $6,000

COGS = Beginning Inventory + Purchases - Ending Inventory

COGS = $5,000 + $12,000 - $6,000

COGS = $11,000

Cost of Goods Sold Formula with Sales and Gross Profit

We can also use sales and gross profit to derive COGS. The formula becomes:

COGS = Sales - Gross Profit

Example:

Suppose you have total sales of $50,000 and a gross profit of $20,000:

COGS = Sales - Gross Profit

COGS = $50,000 - $20,000

COGS = $30,000

Cost of Sales Formula

Cost of Sales is often used interchangeably with COGS in many businesses. The formula is the same:

Cost of Sales = Beginning Inventory + Purchases - Ending Inventory

Example:

With the following data:

1. Beginning Inventory: $8,000
2. Purchases: $25,000
3. Ending Inventory: $10,000

Cost of Sales = $8,000 + $25,000 - $10,000

Cost of Sales = $23,000

Cost of Goods Sold Calculator

A COGS calculator can be a handy tool for business owners. Many accounting software, including Excel templates, offer COGS calculators to automate the process.

Example:

You enter:

1. Beginning Inventory: $4,000
2. Purchases: $15,000
3. Ending Inventory: $5,000

And the calculator will automatically compute:

COGS = $4,000 + $15,000 - $5,000

COGS = $14,000

Cost of Goods Sold Formula in Excel

Using Excel to calculate COGS is simple and effective. Here’s a basic example:

Place the following in cells:

1. A1: Beginning Inventory
2. A2: Purchases
3. A3: Ending Inventory

Then in A4, you use the formula:

`=A1 + A2 - A3`

Example:

A1: $5,000

A2: $16,000

A3: $6,000

A4: `=A1 + A2 - A3`

Resulting in:

A4 = $15,000

How to Calculate Cost of Goods Sold from Income Statement

To find COGS from an income statement, follow these steps:

1. Locate the beginning inventory, usually found at the end of the prior period.
2. Find total purchases throughout the period.
3. Determine ending inventory on the income statement.

Then apply the COGS formula.

Example:

From your income statement:

1. Beginning Inventory: $9,000
2. Purchases: $18,000
3. Ending Inventory: $10,000

COGS from the income statement would be:

COGS = Beginning Inventory + Purchases - Ending Inventory

COGS = $9,000 + $18,000 - $10,000

COGS = $17,000

COGS Formula with Sales

By combining sales data, you can derive COGS using Gross Profit:

COGS = Sales - Gross Profit

Example:

Sales: $100,000

Gross Profit: $40,000

COGS = Sales - Gross Profit

COGS = $100,000 - $40,000

COGS = $60,000

Cost of Goods Available for Sale Formula

This formula highlights the total value of goods available for sale during a period.

Cost of Goods Available for Sale = Beginning Inventory + Purchases

Example:

1. Beginning Inventory: $7,000
2. Purchases: $20,000

Cost of Goods Available for Sale = $7,000 + $20,000

Cost of Goods Available for Sale = $27,000

Conclusion

Understanding the Cost of Goods Sold (COGS) is fundamental for any business involved in selling products. COGS allows you to determine the direct costs associated with producing your goods and can significantly impact your financial health. By using the formulas and examples provided here, along with tools like Excel or a COGS calculator, you can effectively manage your inventory and track your financial performance.

If you're seeking an inventory management solution to help streamline these operations, consider using Ordoro, a comprehensive platform perfect for managing all aspects of your inventory, including COGS. Several hundreds of happy Shopify merchants have already benefited from Ordoro’s services. Ensure you keep a keen eye on your COGS to maintain profitability and make informed business decisions.