How to Account for Cost of Goods Sold

The cost of goods sold (CoGS) for a period is the the value of the inventory at the beginning of a plus the inventory purchases minus the value of the inventory at the end. This calculation is typically made at the end of each month, quarter or other reporting period. Keeping track of inventory costs is an important part of staying on top of any business plan, so it's a good idea to stay on top of this measure. Read on to find out how.

Determine the beginning inventory value.

This should always be the ending inventory value from the previous reporting period. If you are a seller, this number will consist of the cost of all the merchandise in your stock that you plan on selling to customers. If you are a manufacturer of goods, this number will consist of all the merchandise you plan on selling to merchants, as well as the cost of raw materials, work in progress, and other materials and supplies associated with your manufacturing.

• For this example, assume the ending inventory from the previous period was $20,000.

Add the value of all inventory purchases. 
This figure can be obtained by adding up the amounts from each invoice for products received during the month. Products received, but not yet invoiced, should be priced according to the purchase order. If you are a manufacturer, this includes the cost of all raw materials purchased for manufacture into a finished product, during this recording period.

• Assume your total inventory purchases for the period are $10,000 for the purposes of this example.

Calculate the labor costs involved for manufacturing the goods. 

This figure will contain the wages and salaries of all manufacturing employees plus the cost of their benefits. Typically, wholesalers or resellers will not include the cost of labor in this figure, as it cannot be properly charged to the "cost" of the goods.

• For manufacturers, include all direct labor (those employees directly involved with building merchandise out of the raw materials) and indirect labor (employees who serve a necessary factory function, but not one directly involved with the manufacturing of goods). Administrative expenses are not included.
• For this example, manufacturing labor costs for this period were $5,000.

Account for materials, supplies, and other costs of manufacturing.

For manufacturers, containers, the cost of freight, and the cost of overhead expenses like rent, heat, light, power, and other expenses associated with keeping manufacturing facilities open can be included in this figure.

Add these numbers together to determine the cost of goods available. 

This is the number from which you'll subtract the ending inventory to determine the CoGS.

• $20,000 (Beginning inventory) + $10,000 (purchases) + $5,000 (manufacturing labor costs) = $35,000 Cost of Goods Available.

Determine the ending inventory value.

Calculating this value will depend upon the inventory tracking method used by your business. Some track using a First In, First Out (FIFO) method, which involves keeping inventory not every time purchases come in or out, but periodically throughout the period on a set timetable.

• Say the ending inventory value in this example is $15,000.

Subtract the ending inventory value from the cost of goods available.

The result will be the Cost of Goods Sold (CoGS).

• $35,000 - $15,000 = $20,000 COGS.