Cost of Goods Sold Formula

Cost of Goods Sold Formula (Table of Contents)

• Cost of Goods Sold Formula
• Cost of Goods Sold Calculator
• Cost of Goods Sold Formula in Excel (With Excel Template)

Cost of Goods Sold Formula

The bid-ask spread is the difference between bid price and ask price that dealers quote and it is the source of dealer’s compensation.

Here’s the Cost of Goods Sold formula –

Examples of Cost of Goods Sold Formula

Let’s take an example to find out the Cost of Goods Sold for a company: –

Cost of Goods Sold Formula – Example #1

Let’s take the example of a company A which has a beginning inventory of $20000. The company purchases raw materials and uses labour to produce goods that it sells and the total value for the same is $5000. The ending inventory at the end of the year is $15000.

Hence, Cost of Goods Sold can be calculated as: –

• Cost of Goods Sold = Beginning Inventory + Purchases during the year – Ending Inventory
• Cost of Goods Sold = $20000 + $5000 – $15000
• Cost of Goods Sold = $10000

Cost of Goods Sold Formula – Example #2

Let’s take an example of HUL and assuming for the year 2017-18, beginning inventory was Rs 12000 Cr and ending inventory was Rs 15000 Cr. The purchases of stock in trade were Rs 6000 Cr.

Hence, Cost of Goods Sold can be calculated as: –

• Cost of Goods Sold = Beginning Inventory + Purchases during the year – Ending Inventory
• Cost of Goods Sold = 12000 + 6000 – 15000
• Cost of Goods Sold = Rs 3000 Cr

Cost of Goods Sold Formula – Example #3

Taking another simple example, for the automobile maker Ferrari, if beginning inventory was $20 million and ending inventory was $18 million. The purchases for the year was $5 million.

Hence, Cost of Goods Sold can be calculated as: –

• Cost of Goods Sold = Beginning Inventory + Purchases during the year – Ending Inventory
• Cost of Goods Sold = $20 million + $5 million – $18 million
• Cost of Goods Sold = $7 million

Explanation of Cost of Goods Sold Formula

Cost of Goods Sold or COGS can be explained as the cost to a company for acquiring or manufacturing the products which it sells in the market. So the only costs that can be included in the calculation of COGS are the ones that are directly associated with the production of each company’s costs. These costs are the purchase of raw materials, cost of labour and manufacturing overhead. Taking an example, for a company like Ferrari, the direct costs that can be associated with COGS are the parts that go in making a Ferrari car and the labour costs used to manufacture it. The costs that cannot be included in Cost of Goods Sold are the costs of sending the car to a particular dealership or sales workforce cost in selling a car. Also, another important point to be noted is that the Ferrari cars that the company was unable to sell, the costs associated with it will not be a part of COGS.

Also, there are various methodologies of calculating beginning and ending inventory which might change the amount of Cost of Goods Sold for a company. The three methods that are generally used by companies are – First In First Out (FIFO), Average Cost and Last In First Out (LIFO).

FIFO: – In FIFO method, it is assumed that the earliest inventory which was manufactured or purchased are sold first. So in case of an inflationary environment where there are rising prices, any company will be selling its least expensive products first which will result in a larger net income.

Average Cost: – In this method, the average cost for all goods purchased is used and based on the cost per product the value of the cost of goods sold is estimated. This method is best suited as it prevents any discrepancies due to inflationary or deflationary environment.

LIFO: – In the LIFO method, it is assumed that the latest inventory which was manufactured or purchased are sold first. So during the period of rising prices, the net income of any company will decrease since the most expensive products will be sold first leading to a higher cost of goods sold.

Significance and Use of Cost of Goods Sold Formula

The Cost of Goods Sold is one of the important financial metrics and can be seen on the company’s profit and loss statement. This metric is used to subtract from the company’s revenues to estimate Gross Profit for any company. The Gross Profit Margin which is Gross Profit/Revenues is then used to estimate whether the company is efficiently utilizing its production processes and its labour. Any increases in the COGS might indicate that the company has to bear high raw material costs or increased labour costs which might affect its bottom line.

But the COGS can be easily manipulated due to various accounting methods discussed above to give false impressions of overall profits. There are other methodologies such as by increasing manufacturing overhead costs, inflating discounts and returns to suppliers and altering the actual amount of inventory at the end of the year. If the ending inventory is higher than actual, then it will lead to underreporting of COGS which will increase the net income. Hence, investors need to be careful if there are sudden changes in COGS.

Cost of Goods Sold Calculator

You can use the following Cost of Goods Sold Calculator

Cost of Goods Sold Formula in Excel (With Excel Template)

Here we will do the same example of the Cost of Goods Sold formula in Excel. It is very easy and simple. You need to provide the three inputs i.e Beginning Inventory, Purchases during the year and Ending Inventory

You can easily calculate the Cost of Goods Sold using Formula in the template provided.

Conclusion

Cost of Goods is an important metric that is used to determine Gross Profit for a company. There are different accounting methodologies such as FIFO, LIFO and Average Cost method to determine the beginning and ending inventory for a company. The inventory measurement is then used to calculate the Cost of Goods Sold for a company. Investors need to take special care if there are any large changes in COGS as these can be easily modified due to various accounting methodologies.

Recommended Articles

This has been a guide to a Cost of Goods Sold formula. Here we discuss its uses along with practical examples. We also provide you with Cost of Goods Sold Calculator with downloadable excel template. You may also look at the following articles to learn more –

1. Guide to Rule of 72
2. Formula for Inventory Turnover Ratio
3. Calculate Net Working Capital Using Formula
4. Net Interest Margin Formula