If you are running a company or if you are working as an accounting, you will be familiar with the meaning of Cost of Goods Sold or usually known as COGS. COGS is the costs that go into creating the products that a company sells; therefore, the only costs included in the measure are those that are directly tied to the production of the products.
For example, the COGS for an mobile phone maker would include the material costs for the parts that go into making the mobile phone along with the labor costs used to put the mobile phone together. The cost of sending the mobile phones to buyers and the cost of the labor used to sell it would be excluded. That is the example of the basic interpretation of COGS. The accounts included in the COGS calculation will differ from one type of business to another.
Based on accounting rules and inventory valuation method, COGS can be calculated using one of three cost flows :
1. First In, First Out (FIFO), items purchased first are sold first.
2. Last In, First Out (LIFO), items purchased last are sold first.
Note that these are cost flow assumptions. This means that the order in which costs are removed from inventory can be different from the order in which the goods are physically removed from inventory.
There several factors that can affect the choice of cost flow, and depend on your company policy.
This article will give you consideration on choosing the better cost flow method for your company, where it states some consideration as follows :
FIFO gives us a better indication of the value of ending inventory (on the balance sheet), but it also increases net income because inventory that might be several years old is used to value the cost of goods sold. Increasing net income sounds good, but remember that it also has the potential to increase the amount of taxes that a company must pay.
LIFO isn’t a good indicator of ending inventory value because the left over inventory might be extremely old and, perhaps, obsolete. This results in a valuation that is much lower than today’s prices. LIFO results in lower net income because cost of goods sold is higher.
Average Cost produces results that fall somewhere between FIFO and LIFO
This COGS calculator is the tool I used to ease my accounting people to get the COGS quicker. If you are running the retail business with fast moving item, you can use this calculator. I put some samples inside to explain to ease you understanding the principle.
Steps to use this calculator are as follows :
1. Type in your month period
2. Type in your beginning inventory unit and price
3. Type in your sold unit
4. Start type in your net purchases including unit and price information within that period
Ending inventory will be calculated automatically with following formula :
Ending Inventory = Beginning Inventory + Net Purchases – COGS
And then you will see that everytime you put your net purchases inside the table, the COGS will be changed automatically.
You can download the calculator here.