Formula to Calculate Cost of Goods Sold
The formula for calculating Cost of Goods Sold (COGS) is as follows:
1. Basic COGS Formula:
COGS = Opening Inventory + Purchase or Production Costs – Closing Inventory
This formula takes into consideration:
- Opening Inventory is the value inventory levels at the beginning of the accounting period.
- Closing Inventory is the value inventory levels atend of the accounting period.
- Purchases includes the costs associated with additional production or purchase during the accounting period.
Examples:
Q1. A company’s opening inventory is $100,000, purchases during the period amount to $150,000, and the closing inventory is $120,000. Calculate COGS.
Solution:
COGS = 100,000 + 150,000 – 120,000 = $130,000
This means that the cost of goods sold during the specified period is $130,000.
Q2. If at the beginning of the year, the store had $50,000 worth of inventory, made purchases totaling $120,000 throughout the year, and ended the year with $30,000 worth of unsold inventory. What a COGS would be?
Solution:
COGS = 50,000 + 120,000 – 30,000 = $140,000
This implies that the cost of clothing sold during the year was $140,000.
2. Manufacturing Formula:
COGS = Direct Materials + Direct Labor + Manufacturing Overhead
This formula takes into consideration all the factory related expenses incurred to manufacture the product:
- Direct Materials is the cost of raw materials and components directly used in the production of goods.
- Direct Labor is the cost of labor directly involved in the manufacturing or production process.
- Manufacturing Overhead includes certain indirect costs related to production, such as factory rent, utilities, and maintenance.
Examples:
Q1. Calculate Cost of Goods Sold (COGS) from the following information:
- Purchases $16,000
- Wages $60,000
- Factory Rent $100,000
- Factory Electricity $42,000
Solution:
COGS = 16,000 + 60,000 + 1,00,000 +42,000 = $218,000
Q2. Calculate Cost of Goods Sold (COGS) when purchases amount to $200,000, Carriage Inwards $20,000, Wages $50,000, Octrio Charges $ 4,000, Fuel and Power $30,000.
Solution:
COGS = 2,00,000 + 20,000 + 50,000 + 4,000 + 30,000 = $304,000
3. Retail Formula:
COGS = Beginning Inventory + Net Purchases − Ending Inventory
This formula takes into consideration:
- Beginning Inventory is the value of the inventory at the beginning of the accounting period.
- Net Purchases is the total purchases minus any purchase returns and allowances.
- Ending Inventory is the value of the inventory at the end of the accounting period.
Examples:
Q1. Calculate Cost of Goods Sold (COGS) when:
- Purchase $40,000
- Return Outward $10,000
- Opening Stock $20,000
- Colsing Stock $15,000
Solution:
COGS = 20,000 + (40,000 – 10,000) – 15,000 = $35,000
Q2. XYZ Retailer provides the following information. Calculate Cost of Goods Sold (COGS) for XYZ Retailer.
- Beginning Inventory $50,000
- Net Purchases $200,000
- Ending Inventory $30,000
Solution:
COGS = 50,000 + 200,000 – 30,000 = $220,000
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