![]() When financial statements are presented, the amount for COGS is reflecting the inventory that was sold over the course of the period. Additionally, it might not apply to others.ĬOGS= Beginning Inventory + P – Ending Inventory The calculation for COGS includes ending inventory across two separate periods, but in practice, inventory is only one component of COGS for certain businesses. Modern-day accounting and Enterprise Resource Planning ( ERP) systems have sophisticated means of tracking inventory and other raw materials in order to calculate COGS in real-time. Finally, gross profit is reduced by estimated variable expenses to arrive at a net income estimate. They do this by using COGS to calculate gross profit margin, which is then used, in conjunction with revenue expectations to arrive at expected gross profit. Because it represents direct production costs, analysts regularly review COGS over time to identify if a business is becoming more efficient and broadening its gross profit potential.Īdditionally, it is used by financial analysts to estimate various financial metrics, including net income. How To Interpret COGSĪs we already mentioned, COGS is an important financial metric that analysts use in a variety of ways. Because of this, COGS is considered a profitability metric as well as an accounting term.Īny expense not directly related to the production of a good or service is excluded from COGS and is instead presented in the most relevant line item on the income statement. COGS is an important financial metric that is subtracted directly from gross revenue to arrive at gross profit. What Is Cost Of Goods Sold (COGS)?Ĭost of goods sold is a term used to categorize the cost directly related to producing a good or service. In this post, we will cover what COGS is, how to interpret it, how to calculate COGS, and how it is impacted by various cost methods. It is required to be presented in the financial statements under US GAAP and is widely used by analysts and investors to monitor the profitability and efficiency of a business, especially over time. Smaller organizations may not have sufficient staff to conduct this analysis, and so do not have a reserve for obsolete inventory.Cost of goods sold (COGS) is an important accounting term to familiarize yourself with. This estimate is usually based on an analysis of the proportion of obsolete and damaged goods found in the inventory. ![]() The cost of goods available for sale tends to be somewhat overstated, since it may include obsolete or damaged goods that are not really "available for sale." In a well-run accounting department, a reserve for obsolete inventory will be used that reduces the cost of goods available for sale by an estimate of goods that may not be sellable. Understanding the Cost of Goods Available for Sale Thus, the total cost of goods available for sale at the end of January (prior to any calculation of the cost of goods sold) is $1,765,000. During the month, it acquires $750,000 of merchandise and pays $15,000 in freight costs to ship the merchandise from suppliers to its warehouse. Example of the Cost of Goods Available for SaleĪBC International has $1,000,000 of sellable inventory on hand at the beginning of January. Under the periodic inventory system, the ending inventory balance is then subtracted from the cost of goods available for sale to arrive at the cost of goods sold (which appears in the income statement). The cost of any freight needed to acquire merchandise (known as freight in) is typically considered a part of this cost. ![]() The formula is as follows:īeginning sellable inventory + Finished goods produced + Merchandise acquired = Cost of goods available for sale The calculation of the cost of goods available for sale is to add together the total of beginning sellable inventory, finished goods produced, and merchandise acquired. Related AccountingTools CoursesĬost Accounting Fundamentals How to Calculate the Cost of Goods Available for Sale As such, it is an important calculation for any manufacturing, retailing, or distribution business that sell goods to its customers (as opposed to services). This information is used to derive the cost of goods sold for any reporting period. The cost of goods available for sale is the total recorded cost of beginning finished goods or merchandise inventory in an accounting period, plus the cost of any finished goods produced or merchandise added during the period. What is the Cost of Goods Available for Sale?
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