How to calculate the cost of products and goods you have sold?
The “Cost of Goods Sold” is determined using the equation:
- Starting Inventory + Inventory Bought – Remaining Inventory = Cost of Goods Sold
A closer look at the equation will help you to make more sense of it.
The starting inventory along with what has been procured during the specific time period results in the total amount of inventory that was available to be sold. This is sometimes referred to as the Cost of Products or Goods Available for Sale.
In the event that something is no longer in inventory, we can deduce that it must have been sold. An item that no one purchased needs to be subtracted when determining Cost of Products or Goods Sold.
- Example-John sells used textbooks online. When doing inventory on January 1, he has $5,000 worth of inventory. During the month of January, he adds $2,000 worth of textbooks. His inventory at the end of the month shows he has $1,000 worth of inventory at that point in time.
We then use the formula to determine that John’s Cost of Products or Goods Sold for January is $6,000. The following shows how to calculate the cost of items you have sold:
- Starting Inventory + Inventory Bought -Remaining Inventory = Cost of Items Sold
$5000 + $2000 – $1000 = $6000
The equation is not complete. It is simply a starting point. One thing that it doesn’t account for is any inventory that was stolen or damaged and no longer can be sold. There is no way to count which items have been damaged or stolen. The reason is that inventory is not being counted by each item.
Limitations of Calculating Cost of Items Sold using this method
Calculating Cost of Items Sold is actually more difficult. A company must account for changes in pricing and it must take into consideration which items were sold, the less expensive ones or the more expensive ones.
- Example: Jamie sells affordable shirts online. In July, the company she gets her shirts from increases the price from $4 a shirt to $5 a shirt. Jamie is able to sell 100 shirts in July, but she doesn’t know at what price the shirts were sold. Is her cost of the items she sold $400 or $450?
To determine the answer there are three methods which can be used which are average cost, LIFO, and FIFO.
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