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Calculating the Cost of Goods Sold Ratio

  
  
  
  
  
  

We've had great questions submitted to the Bean Counter lately, and one we've seen several times has to deal with cost of goods sold. This week we're going to cover calculating the cost of goods sold ratio.

The cost of goods sold (also known as COGS or cost of sales) is the direct for a company to produce a product and sell its services. While the cost included in the COGS differs depending on the business, they typically include inventory sold, raw material, and freight and labor costs.

How do you calculate the Cost of Goods Sold ratio? The basic way to calculate the COGS is to start with the beginning inventory for the period and adding the total amount of purchases made during the same period, then subtracting the ending inventory.

For example:

Your company has $25 million in inventory, makes $15 million in purchases and ends with $10 million in inventory; the COGS would be $30million.

$25 million starting inventory + $15 million in purchases - $10 million ending inventory =$30 million COGS.

Knowing and understanding the COGS is important because it helps companies make important decisions when it comes to pricing products and services. It helps to uncover opportunities to reduce cost and improve production.

Keep in mind that if you want to have accurate COGS, you must have a well managed inventory system.

If you have an accounting question, submit it to the Bean Counter.

 

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