How to Calculate COGS
Find out the average cost of purchased inventory., Find out the average cost of the goods you produced., Take a physical inventory count., Calculate COGS using the average cost.
Step-by-Step Guide
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Step 1: Find out the average cost of purchased inventory.
Average cost is not only an acceptable reporting method but also can be a helpful way to think about the products in your inventory over a longer scale of time.
Add all inventory purchase prices for a single product type together and divide by the number of products purchased to get the average cost.
For example, $1.00 + $1.50/2 = $1.25 average cost. -
Step 2: Find out the average cost of the goods you produced.
If instead your company purchases raw materials and then produces its own inventory, this process will require some subjective judgement.
Set aside a time period and a number of inventory units produced.
Add the total cost (often estimated) of both the materials and the labor specifically used to make the product.
Now divide by the total inventory units produced in that time.Always be certain you are abiding by the appropriate laws and regulations governing your company's accounting practices as there are regulations governing how to compute inventory cost of produced goods.
This cost will certainly vary by product but may vary with the same product over time. , Note the amount of inventory on hand at the start date and again at the end date.
Multiply the average cost by the difference between your beginning and ending inventory. , The total spent on widgets is $1.25 x 20 widgets = $25.
With 15 widgets sold, the total COGS under this method is $18.75 (15 x $1.25).Companies use the average cost method when their products are easily substituted or physically indistinguishable from each other, such as commodities like minerals, oil and gas.Most companies that use the Average Cost Reporting Method compute the average cost of goods on a quarterly basis. -
Step 3: Take a physical inventory count.
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Step 4: Calculate COGS using the average cost.
Detailed Guide
Average cost is not only an acceptable reporting method but also can be a helpful way to think about the products in your inventory over a longer scale of time.
Add all inventory purchase prices for a single product type together and divide by the number of products purchased to get the average cost.
For example, $1.00 + $1.50/2 = $1.25 average cost.
If instead your company purchases raw materials and then produces its own inventory, this process will require some subjective judgement.
Set aside a time period and a number of inventory units produced.
Add the total cost (often estimated) of both the materials and the labor specifically used to make the product.
Now divide by the total inventory units produced in that time.Always be certain you are abiding by the appropriate laws and regulations governing your company's accounting practices as there are regulations governing how to compute inventory cost of produced goods.
This cost will certainly vary by product but may vary with the same product over time. , Note the amount of inventory on hand at the start date and again at the end date.
Multiply the average cost by the difference between your beginning and ending inventory. , The total spent on widgets is $1.25 x 20 widgets = $25.
With 15 widgets sold, the total COGS under this method is $18.75 (15 x $1.25).Companies use the average cost method when their products are easily substituted or physically indistinguishable from each other, such as commodities like minerals, oil and gas.Most companies that use the Average Cost Reporting Method compute the average cost of goods on a quarterly basis.
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Charles Sullivan
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