What is cost of goods sold?
Cost of goods sold is the total amount your business paid as a cost directly related to the sale of products purchased for resale. This cost may be the purchase price from your vendor plus any additional direct costs you may incur for this item. In other words, the cost of the product that you purchased and entered into your inventory will be the cost used in calculating your cost of goods sold depending on the valuation method you select. Cost of goods sold is an important number for businesses to track and is used for accounting profit and loss statements.
Calculating cost of goods sold
Beginning Inventory: This is the $ value of your inventory at the start of the selected period.
Purchases: This is the $ value of purchases within the selected period.
Ending Inventory: This is the $ value of your inventory at the end of the selected period.
Inventory costs may be a little more complicated to calculate depending on your business’s inventory method. If you use Average Cost or FIFO “first in, first out”, for example, the costs may vary.
What is the Average Cost Method?
The average cost method assigns a cost to inventory items based on the total cost of items purchased in a period divided by the total number of items purchased. This average cost method uses the weighted-average of all inventory purchased in a period to assign value to cost of goods sold as well as the cost of goods still available for sale.
For example, the following represents inventory purchases made by a company:
Purchase Date | Number of Items | Cost Per Unit | Total Cost |
01/07 | 10 | $200 | $2,000 |
01/20 | 15 | $225 | $3,375 |
02/10 | 5 | $175 | $875 |
03/05 | 20 | $250 | $5,000 |
Total | 50 |
| $11,250 |
Assume that the company sold 30 units in the first quarter of the year. The weighted-average cost is the total inventory purchased in the quarter, $11,250, divided by the inventory count from the quarter, 50 for an average of $225. The cost of goods sold will be recorded as 30 units sold x $225 average cost = $6,750. The inventory available for sale a the end of period, will be the 20 remaining items still in inventory x $225 = $4500.
What is the "first in, first out" FIFO Method?
The FIFO method is a valuation method in which items acquired first are sold. This method assumes that the items with the oldest costs are included in the COGS. FIFO assumes that the remaining inventory consists of items purchased last. Under FIFO the cost of inventory purchased first will be recognized first.
For example, the following represents inventory purchases made by a company:
Purchase Date | Number of Items | Cost Per Unit | Total Cost |
January | 10 | $100 | $1000 |
February | 5 | $150 | $750 |
If 10 items were purchased at a cost of $100 in January and then in February 15 more items were purchased for $150, the cost of the first item resold of $100 would be used to assign value to cost of goods sold . After 10 items were sold, the new cost of the item would become $150 regardless of any additional inventory purchases made.
Cost of Goods Sold Reporting
Now that you have an understanding of some basic cost of goods sold terms and methodologies you can report on your cost of good sold using our COGS report.
In this report you can select your period, valuation method and drill down with these additional available filters:
Items - you can report on a specific product in your inventory.
Status - you can view active or discontinued inventory items.
Group - you can report on a group of products.
Category - you can report on a category of products.
Location Type - you can select between Team Member or Warehouse.
Inventory is calculated for items that are assigned to your team or sitting on the shelfs in the warehouse. You can use the Location Name to view a specific team member or warehouse location.
Understanding The Data
Purchase Price Range is the the cost of the item recorded from the lowest cost entered to the highest cost for the period.
QTY of Goods Purchased is the count of items entered into inventory during the period.
Purchases is the total cost of items entered into inventory for the period.
Transfer In (QTY) is the count of the items that have been transferred in from one location to another without a sale or purchase being involved.
Transfer In ($) is the total value of the items that have been transferred in from one location to another. This $ value will increase your available inventory values at a specific location.
Transfer Out (QTY) is the count of the items that have been transferred out from one location to another without a sale or purchase being involved.
Transfer Out ($) is the total value of the items that have been transferred out from one location to another. This $ value will decrease your available inventory value at a specific location.
Adjustments To Inventory
If adjustments are made to inventory and items are deleted from the system prior to the period you are viewing the beginning inventory $ value will reflect the $ value of inventory available after the adjustments. The adjustment value will vary depending on the method used (Average Cost or FIFO). If the adjustments to inventory are made during the period the ending inventory $ value will reflect these adjustments as well.