![]() ![]() This is why you need the formula to calculate COGS. ![]() Remembering or finding out the costs associated with every stock item in your warehouse would be difficult and, might I add, a waste of your time. These costs could be different for each item in your inventory. And there is no way you'd remember what that specific price was.Īlso, procuring or manufacturing the items & goods would incur additional costs, e.g., shipping, freight, labor, processing, duty, and handling costs. The last item you sold may have been purchased at a different price than the other stock for the same product six months ago. This is the basis of inventory management. So inventory is either being procured, processed, or being shipped out. To answer this, let's see how a business like yours might be managing goods & inventory in real life.Ī trading company would procure the required stock from a few trusted suppliers and then ship it to interested buyers.Ī manufacturing company would procure the raw materials from their suppliers before processing the individual items to create their end product. ![]() Why can't you just look up the last vendor bill and check the purchase price? Why You Need to Calculate Cost of Goods Sold To know this number, though, you'd need to know the Cost of Goods Sold formula.īut before we jump into formulas and calculations, here is a question for you. How do you know your business is not bleeding money when you make a sale? One way is to ensure that the selling price is more than the cost of the goods sold, aka COGS. ![]()
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