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The Cost of Goods Sold (COGS) is the total of all the costs that go into producing  a product. Calculating this value can become complicated depending on the number of different products you produce and the costs associated with producing each.

The basic COGS calculation is:

Value of Inventory at the Beginning of the Year
+ Additional Inventory Cost (inventory purchased throughout the year)
- Inventory at the End of the Year
= Cost of Goods Sold

In order to use the calculation, you must calculate and measure the values within the calculation. Here is the 6-step process:

Step 1: Calculate Inventory at the Beginning of the Year

This inventory includes:

  • Merchandise in stock
  • Raw materials
  • Finished products
  • “In-progress” products

Step 2: Determine Products Costs per Year

These are all costs that go directly into production or purchasing of a product:

  • Cost to buy raw materials (seeds, livestock, dairy, flour, etc.)
  • Packaging costs
  • Cost of buying products for resale (if you are a food hub)
  • Cost of delivery to get materials/products

Step 3: Determine Production Costs

These are all costs that indirectly go into production or purchasing of a product:

  • Cost of equipment to produce or package goods
  • Depreciation and maintenance of equipment
  • Cost of labour and employees
  • Software/programs used for administration

Step 4: Determine Facility Costs

These are all costs that goes into maintaining and the use of your facilities:

  • Rent or mortgage
  • Utilities
  • Cost of maintaining land or facilities.

Step 5: Determine Inventory at the End of the Year

The final value to be determined is your inventory at the end of the business year. The easiest way to determine this value is to take physical inventory. Any lost or worthless inventory should not be included in this value as it can not be sold.

Step 6: Do Your Calculation

After you have collected all of the values from the steps listed above, you are ready to do your COGS calculation. For example:

$20 000 (inventory at the beginning of the year)
+ $15 000 (product costs + production costs + facility costs)
- $30 000 (inventory at the end of the year)
= $5 000 (COGS)

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