Home Business ManagementBusiness Math Business Math: How to Calculate the Cost of Goods Sold

Business Math: How to Calculate the Cost of Goods Sold

by Timesheets.com
Paper, pen and calculator representing calculating the cost of good sold.

Understanding the Cost of Goods Sold (COGS) is important for businesses to measure efficiency and profitability. In this article, we’ll explain what COGS is, how to calculate it, and why it matters for your business.

What is the cost of goods sold?

The cost of goods sold refers to direct expenses related to the purchase or production of goods or services. COGS includes the costs related to labor, raw materials, and overhead expenses directly associated with production. Overhead expenses such as rent should not be part of the COGS calculation.

Benefits of understanding COGS

Calculating COGS is important to understand how much it really costs to create or acquire a product. This insight informs decisions and ensures accuracy across many critical areas of the business:

How to Calculate COGS

With a few pieces of information and these simple steps, you can calculate the cost of goods sold for your business:

Step 1: Start with beginning inventory

First, identify the value of your beginning inventory–leftover inventory from the previous accounting period. This should include finished goods, raw materials, and items in progress.

Step 2: Add Purchases

Next, calculate the total cost of raw materials, inventory, or supplies that were manufactured or purchased in the current accounting period.

Total Goods for Sale = Beginning Inventory + Purchases

Step 3: Subtract Ending Inventory

Third, identify the value of your ending inventory–inventory remaining at the end of the accounting period. Subtract this from the total goods for sale.

COGS = Total Goods for Sale - Ending Inventory

While calculating the COGS requires a bit of a learning curve and time commitment–it’s worth it. Mastering this calculation can help you to more confidently navigate your business’s operations and financial plan.

Interested in more opportunities to optimize your business operations? Timesheets.com is an online time and expense tracking software that helps to maximize efficiency. Start a FREE trial to see how Timesheets.com can elevate the success of your business.

You may also like

Leave a Comment