What is the Cost of Goods Purchased Formula?
The cost of goods purchased is the total cost of merchandise bought. It measures the total amount of goods cost after return, discount, and freight are taken into account.
Significance of Cost of Goods Purchased in E-commerce Business
The cost of goods purchased helps an e-commerce business determine whether it spent more on acquiring goods than on selling its services and goods.
Applications of the Cost of Goods Purchased Formula
- The cost of goods purchased formula is helpful for e-commerce businesses and companies that purchase large amounts of inventory regularly
- Companies can decide the markup price for selling the products in inventory
Cost of Goods Purchased Formula
Cost of Goods Purchased =
Average Inventory + Initial purchase cost – (Purchase allowances + Purchase discounts + Purchase returns)
Definition of each element used in the formula
Average inventory: It is the mean value of inventory during two or more accounting periods. It can be calculated using this formula:
Average Inventory =
(Beginning Inventory+Ending Inventory)
Initial purchase cost: It is a sum of the import duties, purchase price, and other taxes.
Purchase allowances: The allowance refers to a decrease in the buyer’s cost of goods that was purchased.
Purchase discounts: A deduction that a firm might receive if the supplier provides it and the firm pays the supplier’s invoice in a specified period.
Purchase returns: When a buyer (an individual or a business) returns goods they purchased to the seller for store credit or a refund.
How to Use the Cost of Goods Purchased Formula to Calculate a Business’ Cost of Goods Purchased?
Suppose Company X manufactures notebooks. Its average inventory value is ₱90,000, the initial purchase cost of cement is ₱60,000, the purchase allowances are ₱25,000, Purchase discounts are ₱15,000 and Purchase returns are ₱5000. According to the cost of goods purchased formula, its value is
COGP = ₱90,000 + ₱60,000 – (₱25,000 + ₱15,000 +₱5000)
What Can You Infer from the Result of the Cost of Goods Purchased Formula?
Cost of goods purchased formula indicates the net cost incurred in acquiring the goods. It lets you arrive at a suitable pricing cost that helps business profit from the investments in goods.