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Inventory & Cost of Goods Sold

lesson · about 3 minutes

What the goods you sold actually cost, and how fast the shelf turns over.

Pen and paper is fine · no calculator needed why?

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the idea

Cost of goods sold is what the goods you sold cost you. You rarely track each item, so you work it out from what the stock cost: what you had, plus what you bought, minus what is still on the shelf.

more of the idea

When prices change, it matters which units count as sold. FIFO (first in, first out) assumes the oldest units go first. Weighted average spreads the total cost evenly over every unit.

Inventory turnover says how many times a year the shelf empties and refills: cost of goods sold divided by average inventory.

techniques

Available minus what is left Beginning inventory, purchases and ending inventory are given.

Goods available: beginning inventory plus purchases.
Cost of goods sold: goods available minus ending inventory.

example Beginning inventory is $4,000, purchases are $9,000, and ending inventory is $3,500. What is cost of goods sold?

Available: $4,000 + $9,000 = $13,000.
Sold: $13,000 − $3,500 = $9,500.

Answer: $9,500

Oldest layer first Two purchases at different prices, using FIFO.

Use up the first purchase completely, at its price.
Take the rest from the next purchase, at its price.
Add the two layers.

example You bought 50 units at $6 and later 50 units at $8. You sell 70 units. Using FIFO (oldest units first), what is cost of goods sold?

First layer: 50 × $6 = $300.
Next layer: 20 × $8 = $160.
Total: $300 + $160 = $460.

Answer: $460

Weight by units Averaging unit costs from purchases of different sizes.

Total cost: units times price for each purchase, added.
Divide by the total number of units.

example You bought 20 units at $5 and 60 units at $9. What is the weighted-average cost per unit?

Total cost: 20 × $5 + 60 × $9 = $640.
Per unit: $640 ÷ 80 = $8.

Answer: $8

watch out for · 4 traps

Using purchases alone as cost of goods sold, or adding the ending inventory instead of subtracting it.
Costing the newest units first under FIFO. That is a different method, LIFO.
Averaging two unit prices without weighting by how many units were bought at each.
Using sales revenue for turnover instead of cost of goods sold, which inflates the number.

practice

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Cost of goods sold from counts

worked example

Beginning inventory is $10,300, purchases are $26,200, and ending inventory is $10,200. What is cost of goods sold?

Goods available: $10,300 + $26,200 = $36,500.
Minus what's still on the shelf: $36,500 − $10,200 = $26,300.

Answer: $26,300.00

FIFO cost of goods sold

worked example

You bought 100 units at $1.50 and later 190 units at $4.50. You sell 193 units. Using FIFO (oldest units first), what is cost of goods sold?

FIFO sells the oldest units first.
First 100 at $1.50 = $150; the next 93 at $4.50 = $418.50.
Total: $150 + $418.50 = $568.50.

Answer: $568.50

Weighted-average unit cost

worked example

You bought 40 units at $14 and 160 units at $12. What is the weighted-average cost per unit?

Total cost: 40 × $14 + 160 × $12 = $560 + $1,920 = $2,480.
$2,480 ÷ 200 units = $12.40 per unit.

Answer: $12.40

Inventory turnover

worked example

Cost of goods sold for the year is $294,000 and average inventory is $49,000. What is inventory turnover?

Turnover = cost of goods sold ÷ average inventory = $294,000 ÷ $49,000 = 6.
The shelf emptied and refilled about 6 times this year.

Answer: 6