Cost of Sold or COGS is a cost of the inventories that business sells. In a manufacturing concern, the task of calculating COGS is not an easy task as the inventories exist in several forms such as raw materials, work in process and finished goods. Within each type of inventories, there may be several further items, you have to have an updated record of every inventory item so that you could valuate COGS rightly.
Once you have an upto date record of inventories, you can value the inventories using either FIFO method or LIFO method. If your inevntory items are homegenous, then you can use the weighted average method to value them. In order to find out the valie of COGS, you need three items:
1. Inventory – opening balance
2. Inventory purcahsed during the year
3. inventory – closing balance
However, if you the business under consideration is involved in manufacturing process, then you have to calculate cost of goods manufactured as well.
Cost of Goods Sold Formula
COGS = Finished goods opening stock + purchases during the year – closing stock
Example Question
ABC is involved in buying and selling of books. During the year, it bought 10 books @ $ 12 each and sold 7 books @ $ 20 each. The opening inventory value of the book is 05 units @ $ 12 per book. Calculate COGS.
Solution
Opening stock = $ 60
Purchases = 10 x 12 = $ 120
Closing stock = (opening stock + purchases) – sold = 8 X 12 = $ 96
COGS = 60 + 120 – 96 = $ 84.