Every business owner must accurately determine their inventory costs to achieve successful financial management. One essential component of this process is calculating the cost of goods available for sale (COGS). This crucial metric helps businesses determine profits, manage inventory levels and make informed decisions on purchasing and pricing. In this article, we will walk you through the steps to calculate the cost of goods available for sale.

Understanding Cost of Goods Available for Sale

Cost of goods available for sale represents the total value of inventory that a business can sell during a specific period. To calculate COGS, you need to consider the beginning inventory value, add any new purchases made during the period in question, and subtract the ending inventory value.

Steps to Calculate Cost of Goods Available for Sale

1. Determine Beginning Inventory Value: Start by identifying the value of your initial stock at the beginning of the accounting period. You can find this figure on your previous period’s balance sheet under ‘Inventory.’

2. Record All Purchases Made During the Period: During your accounting period, track all new purchases or additions made to your inventory. Include all costs related to acquiring these goods – shipping, taxes, insurance, and any additional expenses associated with getting these items ready for sale.

3. Calculate Total Inventory Value: Add your beginning inventory value to all new purchases made during the accounting period as follows:

Total Inventory Value = Beginning Inventory Value + Purchases

4. Determine Ending Inventory Value: At the close of your accounting period, conduct a physical inventory count or use an inventory management system to calculate the value of your remaining stock.

5. Calculate Cost of Goods Sold (COGS): Subtract your ending inventory value from your total inventory value:

COGS = Total Inventory Value – Ending Inventory Value

6. Determine Cost of Goods Available for Sale: Your final step is to add COGS to your ending inventory value:

Cost of Goods Available for Sale = COGS + Ending Inventory Value

Conclusion

Calculating the cost of goods available for sale is an essential aspect of inventory management and financial planning for business owners. It helps you make informed decisions regarding purchasing and pricing, forecast future revenue, and maintain a healthy cash flow. To ensure accurate results, keeping detailed records and regularly monitoring your inventory levels is paramount.