Your business needs to determine COGS to properly file corporate taxes. To accurately claim expenses on business tax returnsĬost of goods sold isn’t just a helpful accounting calculation. Once you review what your competition is charging for such an item, you may decide to either lower your costs or charge more for the item. For instance, you may think a high-priced item is profitable because your customers pay a high amount for it-but when you take a good look at the numbers, the COGS is extremely high. Reviewing COGS thoroughly-if you choose to calculate it individually for top-selling items-may also identify what items are not as profitable. Knowledge is power, and understanding where your team might be overspending can help you make cuts that aren’t serving your business’s bottom line. Sitting down and reviewing these expenses will not only help you calculate COGS, but may also highlight areas where your business is wasting precious resources. From raw materials to labor to shipping and freight costs, there’s a laundry list of direct costs to consider. When you sit down to calculate the cost of goods sold, you’re forced to take a long, hard look at the many expenses that your business incurs producing for-sale inventory. To get a handle on your business’s spending and pricing Why do you need to calculate cost of goods sold?Ĭalculating COGS is essential for a variety of reasons. Need a more “time-sensitive” estimate of your inventory’s value? Moving average cost may help shine a light on your costs for fast-moving inventory. Once you pick a strategy, stay consistent. A good accountant can help you find the most accurate way to keep inventory records and determine the cost of goods sold. It’s not an exact science, and how you count inventory, calculate inventory value, and categorize your direct costs can affect your numbers. Like all formulas, COGS has some limitations. In other words, the business has a cost of goods sold of $75,000 for the fiscal year. By the end of the year, they have $75,000 worth of ending inventory. Over the year, they spend an additional $50,000 on purchases, including direct labor costs. Say a paint manufacturer starts the fiscal year with $100,000 in beginning inventory at retail price. Once you subtract the value of the remaining inventory at the end of the given period, you are left with your cost of goods sold. To solve for COGS, calculate the value of your beginning inventory at the start of the determined period, then add the costs incurred (purchases, and labor or direct sales costs, if applicable) to acquire and manufacture new inventory over that period of time. (Annual tax returns for example, will articulate COGS for an entire year.) That’s because the COGS you calculate will reveal how much cash your business spent on the inventory you sold over a defined time frame. Whether you need to determine COGS for the month, quarter, or entire year, you should ensure you are working with data from one period. Most notably, this includes office maintenance and overhead, sales, and marketing. Note that the indirect costs are not included in COGS. Manufacturing overhead costs, including utilities.Any supplies used to either make or sell the product.Any parts purchased that will be used to create a for-sale product.Any raw materials purchased that will be used to create a for-sale product.Any items purchased that will be resold.Here is a list of the direct costs that should be folded into your cost of goods sold: Costs that can be tied directly to the production process-including labor, overheard, and materials-are also included. This includes the cost of any items your business must purchase or create to manufacture or produce a product it will later sell. In this article, we’ll define cost of goods sold, show you how to calculate cost of goods sold, clarify the cost of goods sold formula, and underscore the importance of COGS.Ĭost of goods sold, by definition, accounts for all the direct costs of producing inventory your business intends to sell. Chiefly, your COGS will help determine just how profitable your business really is. Your business has plenty of reasons to know its cost of goods sold. Cost of goods sold, often referred to as COGS, is an accounting term that articulates the direct costs of manufacturing or producing the items your company sells.
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