The LIFO Method assumes that recent goods purchased are consumed first and the goods purchased first are consumed later. Let’s consider an example to understand how COGS is calculated under the Periodic Inventory System. But Gross Profit alone would not help in comparing the efficiency of your business from year-to-year or Quarter-to-Quarter.

• This is because the oldest costs are considered and are matched with the current revenues.
• The inventory at period end should be $7,872, requiring an entry to increase merchandise inventory by $4,722.
• Also, one needs to keep track of inventory as less inventory could mean losing revenue and customers.
• Check with your tax professional before you make any decisions about cash vs. accrual accounting.
• It includes only those costs that are directly incurred in order to manufacture the goods including the cost of labour, raw material, and overhead expenditure related to the manufacturing of goods to be sold.
• Your business inventory might be items you have purchased from a wholesaler or that you have made yourself.
• The categorization of expenses into COGS or operating expenses (OpEx) is entirely dependent on the industry in question.

Typically, the per-unit cost of your finished goods is derived by adding the costs incurred to produce a bunch of units and then dividing this cost by the number of units in the batch so produced. The indirect costs such as sales and marketing expenses, shipping, legal costs, utilities, insurance, etc. are not included while determining COGS. Cost of Goods Sold (COGS), otherwise known as the “cost of sales”, refers to the direct costs incurred by a company while selling its goods or services.

Calculating COGS using a Periodic Inventory System

The specific identification costing assumption tracks inventory items individually so that, when they are sold, the exact cost of the item is used to offset the revenue from the sale. The cost of goods sold, inventory, and gross margin shown in Figure 10.13 were determined from the previously-stated data, particular to specific identification costing. given the following information for a retailer, compute the cost of goods sold. The specific identification costing assumption tracks inventory items individually, so that when they are sold, the exact cost of the item is used to offset the revenue from the sale. The cost of goods sold, inventory, and gross margin shown in Figure 10.5 were determined from the previously-stated data, particular to specific identification costing.

The cost of goods sold tells you how much it cost the business to buy or make the products it sells. This cost is calculated for tax purposes and can also help determine how profitable a business is. Figure 10.12 shows the gross margin resulting from the weighted-average periodic cost allocations of $8283.

3 Calculate the Cost of Goods Sold and Ending Inventory Using the Perpetual Method

The cost of goods sold (COGS) is an accounting term used to describe the direct expenses incurred by a company while attempting to generate revenue. Of the 1,600 units sold during the period, 300 were from the beginning inventory, 500 from the first purchase, 600 from the second purchase, and 200 from the last purchase. Using the first-in, first-out costing method, the cost of goods sold would be $8,570.