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Cost of Goods Sold (COGS) Estimator

Estimate COGS using the periodic inventory formula: Beginning Inventory + Purchases − Ending Inventory.

Inventory & Purchase Data

Enter figures from your general ledger or physical count.

Purchasing Activity

Understanding the Components

COGS is drawn from these primary ledger accounts

Beginning Inv.

Value of stock at the start of the period. Matches last period's Ending Inv.

Purchases

Cost of new stock bought during the period.

Freight In

Shipping costs to get goods to you. This IS part of COGS.

Ending Inv.

Value of stock left unsold. Must be counted physically.

Standard Periodic Formula

COGS = (Beginning Inventory + Purchases) − Ending Inventory

*Purchases should include Freight-In and exclude Returns/Discounts.

Related Financial Calculators

Gross Margin

Profit after COGS

Inventory Turnover

Sales velocity

Break-Even

Volume needed

Demystifying Cost of Goods Sold (COGS)

COGS is the single largest expense for most businesses. Getting it wrong distorts your profit, your taxes, and your business valuation.

Content

What Exactly Goes Into COGS?

The "Cost of Goods Sold" is strictly the direct cost of producing the goods sold by a company. It includes:

  • Direct Materials: The raw stuff (wood, steel, fabric).
  • Direct Labor: The wages of the specific workers making the product (assembly line workers).
  • Factory Overhead: Electricity for the factory, machine depreciation using the units-of-production method.
  • Freight-In: The cost to ship materials to your warehouse.

It does NOT include:

  • Sales & Marketing costs.
  • Administrative salaries (CEO, HR).
  • Freight-Out (Shipping to customers is a selling expense, not COGS).

Periodic vs. Perpetual Inventory

This calculator uses the Periodic Inventory System formula.

1. Periodic System (The "Formula" Method)

The business doesn't track every single sale's cost in real-time. Instead, they count inventory at the start and end of the month.
Logic: "We started with 10 units, bought 90, and have 5 left. We must have sold 95."
Pros: Simple, low tech. Cons: Cannot detect theft (shrinkage). Theft looks like sales.

2. Perpetual System (The "Scanner" Method)

Every time a barcode is scanned, the software updates inventory and records COGS instantly.
Pros: Real-time data, detects theft (if physical count != computer count). Cons: Expensive setup.

Valuation: FIFO vs. LIFO

The value of "Beginning Inventory" depends on your accounting method:

  • FIFO (First-In, First-Out): Assumes you sell oldest goods first. In inflation, this results in lower COGS and higher reported profit (and higher taxes).
  • LIFO (Last-In, First-Out): Assumes you sell newest (most expensive) goods first. Results in higher COGS and lower taxes.
  • Weighted Average: Blends all costs. Best for liquids or homogeneous goods like grain.

The "Shrinkage" Problem

In the Periodic system, theft acts as a ghost sale.

"If you had 100 units, bought 0, and sold 10, you should have 90. If your physical count shows 80, the missing 10 units are 'Shrinkage'."

With the periodic formula, those 10 missing units are automatically bundled into COGS. This means you do not see the theft expense separately; it just looks like your margins got worse. This is why annual physical counts are critical.

Frequently Asked Questions

Can I perform this calculation for a service business?

Technically, yes, but it is called "Cost of Services" (COS). It includes the direct labor hours of the consultants/engineers and software costs used directly for the client. There is no physical inventory to count.

Why is Freight-In included but Freight-Out excluded?

Accounting rules state that an asset's cost includes all costs necessary to get it ready for sale (which includes bringing it to your warehouse). Shipping it to the customer is a "distribution" activity, happening after the good is ready.

What happens if I overstate my Ending Inventory?

If Ending Inventory is artificially high, COGS becomes artificially low. This inflates your profit and your tax bill. It is a common form of accounting fraud.

What is "Just-In-Time" inventory?

JIT strategies (like Toyota) keep inventory near zero. Purchases = COGS. This saves warehousing costs/obsolescence but leaves you vulnerable to supply chain disruptions.

How does COGS affect depreciation?

Office furniture depreciation is an operating expense. Factory machine depreciation is part of overhead, which gets allocated to inventory cost, and flows into COGS when the product is sold.

What is "Absorption Costing"?

A method where all manufacturing costs (fixed and variable) are absorbed into the inventory cost. This is required for GAAP/IFRS reporting, unlike "Variable Costing" which is used for internal management.

Does currency fluctuation affect COGS?

Yes. If you import raw materials, a weak local currency raises your Purchases cost, increasing COGS and squeezing margins unless you raise prices.

Is labor always part of COGS?

Only "Direct Labor" (people touching the product). A supervisor watching the line is "Indirect Labor" (Overhead). A salesperson is "SG&A" (Operating Expense).

Usage of this Calculator

Practical applications

Who Should Use This?

Small Business OwnersTo close the books at month-end and estimate gross profit before the accountant arrives.
Ecommerce SellersTo track margins on Amazon FBA or Shopify stores where inventory reporting can be complex.
AuditorsTo perform a "reasonableness test" on a client's reported Gross Margin.
Tax PreparersTo calculate Schedule C "Cost of Goods Sold" for IRS reporting.

Limitations

This calculator assumes you do not have "Work in Process" (WIP) inventory, which is common in manufacturing. For manufacturers, a detailed "Cost of Goods Manufactured" schedule is needed before calculating COGS. It also relies on the accuracy of the Ending Inventory count.

Summary

The COGS Estimator simplifies the periodic inventory formula.

By accurately tracking beginning stock, purchases, and ending stock, businesses can determine their true direct costs and gross margins with precision.

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Cost of Goods Sold (COGS) Estimator

Estimate COGS using the periodic inventory formula: Beginning Inventory + Purchases − Ending Inventory.

How to use Cost of Goods Sold (COGS) Estimator

Step-by-step guide to using the Cost of Goods Sold (COGS) Estimator:

  1. Enter your values. Input the required values in the calculator form
  2. Calculate. The calculator will automatically compute and display your results
  3. Review results. Review the calculated results and any additional information provided

Frequently asked questions

How do I use the Cost of Goods Sold (COGS) Estimator?

Simply enter your values in the input fields and the calculator will automatically compute the results. The Cost of Goods Sold (COGS) Estimator is designed to be user-friendly and provide instant calculations.

Is the Cost of Goods Sold (COGS) Estimator free to use?

Yes, the Cost of Goods Sold (COGS) Estimator is completely free to use. No registration or payment is required.

Can I use this calculator on mobile devices?

Yes, the Cost of Goods Sold (COGS) Estimator is fully responsive and works perfectly on mobile phones, tablets, and desktop computers.

Are the results from Cost of Goods Sold (COGS) Estimator accurate?

Yes, our calculators use standard formulas and are regularly tested for accuracy. However, results should be used for informational purposes and not as a substitute for professional advice.