What is Cost of Goods Sold Formula?
The Cost of Goods Sold (COGS) indicates the total cost of producing the goods sold. It is defined as the total cost of services provided. It entails direct material cost, direct labor cost, payroll taxes, direct factory overheads, and others.
Significance of Cost of Goods Sold Formula in E-commerce Business
The cost of goods sold is an important metric that helps e-commerce businesses determine pricing strategies, predict growth rate and manage taxes. Some of its significance include:
- Predicting business profit margins with COGS
- Calculating COGS helps companies determine their net income and provides insight into the business’ health
- Directly influences order quantity, pricing, ad expenditure decisions, and more
Applications of the Cost of Goods Sold Formula
COGS is the direct cost involved in production. Some of the application involved include:
- Calculating the gross profit to manage their labor and goods in production
- Helping e-commerce businesses decrease or remove waste in a business’ production process
- Reducing labor costs and boosting efficiency
- Calculating the accurate taxable income
- Analyzing the health of the e-commerce business
Cost of Goods Sold Formula
COGS =
Beginning Inventory + Purchases – Ending Inventory
Definition of Each Element Used in the Formula
The formula for COGS involves the following elements:
Beginning Inventory: It is the amount of inventory at the start of the stock period.
Purchases: Costs of the goods the company has bought during the accounting period.
Ending Inventory: It is the amount of inventory left during a particular accounting period.
How to Use the Cost of Goods Sold Formula to Calculate a Business’ Cost of Goods Sold?
Suppose company ABC is a manufacturing company of diesel. Its opening inventory at the year’s start is A$10,000, and its ending inventory is A$6,000. It had made purchases of A$7,000 during the year. So, its COGS per the inventory COGS formula:
Cost of Goods Sold =
(Beginning Inventory + Purchases – Ending Inventory)
COGS = (A$10,000 + A$6,000 – A$7,000)
COGS = A$9,000
What Can You Infer From the Result of the COGS Formula?
The cost of goods formula helps you track the overall costs required for calculating profit margins. By using the formula, businesses can derive key metrics like finalizing a pricing strategy, identifying growth opportunities, and computing taxes involved.