The Cost of Goods Sold is a common value used in accounting to derive many other ratios, which in turn are used to determine the health of a business and in which areas there might be room for improvement. It is based on the count and cost of inventory. The cost of goods sold gives you a monetary value for inventory sold, where a physical inventory gives you an idea of what you currently have in stock.

The Cost of Goods Sold can be found through a wide variety of methods, but in the end it always boils down to the following:

Cost of Goods Sold = Cost of Goods Available for Sale - Cost of Ending Inventory

This writeup will feature both standard accounting and non-standard acronyms and abbreviations. They are:

In addition, the standard operators for mathematics on computers will be used to avoid confusion; + for addition, - for subtraction, and * for multiplication. All division will be shown in fraction form rather than using the / character.


Among the specific methods for finding Cost of Goods Sold are:

  1. The specific identification inventory method, in which each item in inventory is valued based on the price paid for it.
    This method works best for low-volume, high-price items which are easily tracked. It complicates things because you must track the price paid for each individual unit. It is the most accurate method, but also the most time-consuming, and virtually impossible in high-volume retail sales environments.

    How to find the Cost of Goods Sold using the Specific Identification Inventory method

    1. Find the cost of goods available for sale (COGAFS).
      COGAFS = Number of units purchased * Cost per unit
    2. Find the cost of ending inventory (COEI).
      COEI = Number of units in ending inventory * Cost per unit
    3. Find the cost of goods sold (COGS).
      COGS = COGAFS - COEI

  2. The weighted-average inventory method, in which the value of a unit is averaged by dividing the cost of goods available for sale by the number of units.
    This method works best for items which have a relatively stable cost, and is very easy to use. Significant fluctuations in the cost of stock may make this method produce undesirable results.

    How to find the Cost of Goods Sold using the Weighted-Average Inventory method

    1. Find the cost of goods available for sale (COGAFS).
      COGAFS = Number of units purchased * Cost per unit
    2. Find the average unit cost.
                                         COGAFS
      Average Unit Cost = ------------------------------------
                           Number of Units Available for Sale
      
    3. Find the cost of ending inventory (COEI).
      COEI = Number of Units in ending inventory * Average Unit Cost
    4. Find the cost of goods sold (COGS).
      COGS = COGAFS - COEI

  3. The First-in, first-out inventory method, or FIFO method, in which the first units sold are assumed to be the first units received, and the ending inventory is assumed to be made up of the most recent units purchased.
    Using this method, the cost of a unit is similar to the current cost to acquire more units. This method produces the most income during periods of high inflation.

    How to find the COGS using the FIFO method

    1. Find the cost of goods available for sale (COGAFS).
      If you have 15 units on the shelf and you most recently purchased a lot of ten units at ten dollars each, preceded by a lot of ten units at five dollars each, then your actual COGAFS will be 10 * 10 + 5 * 5 = 125 dollars.
      COGAFS = Number of Units Purchased * Cost per unit
    2. Assign a cost per unit by assuming that units purchased were amongst the most recently purchased units.
    3. Find the cost of ending inventory.
      COEI = Number of units in ending inventory * assigned cost per unit
    4. Find the cost of goods sold.
      COGS = COGAFS - COEI

  4. The Last-in, first-out inventory method, or LIFO method, in which the most recently purchased units are assumed to be sold first.
    On one hand, the short-term profit on goods sold is less because newer and generally higher-priced goods are sold first. On the other, when the low-priced goods are sold, profits are high. This method results in lower income during periods of high inflation, which reduces the company's income taxes.

    How to find the COGS using the LIFO method

    1. Find the cost of goods available for sale.
      If you first purchased a lot of ten units at $5 a piece, and then ten further units at $10 a piece, and now have fifteen units on the shelf, you will have 10 * 5 + 5 * 10 = 100 dollars of merchandise (by cost) in stock.
      COGAFS = Number of Units Purchased * Cost per unit
    2. Assign a cost per unit by assuming that all units on the shelf were amongst the earliest units purchased -- In this example, 10 dollars.
    3. Find the COEI.
      COEI = Number of units in ending inventory * assigned cost per unit
    4. Find the COGS.
      COGS = COGAFS - COEI

  5. The retail inventory method is perhaps the fastest and most widely useful method of finding the cost of goods sold. It is based partly on net sales.
    This method is based on the retail values and net sales, both of which should be readily abailable.

    How to find the COGS using the Retail Inventory Method

    1. Find the COGAFS.
      COGAFS = Number of units purchased * Cost per unit
    2. Find the retail value of goods available for sale.
    3. Find the cost ratio.
                                    COGAFS
      Cost Ratio = ------------------------------------------
                    Retail Value of Goods Available for Sale
      
    4. Find the ending inventory at retail.
      Ending Inventory at Retail = Retail Value of Goods Available for Sale - net sales
    5. Find the ending inventory at cost.
      Ending inventory at cost = ending inventory at retail * cost ratio
    6. Find the COGS.
      COGS = COGAFS - Ending Inventory at Cost
      OR
      COGS = Dollar value of sales * cost ratio

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