Calculate Ending InventoryĮnding Inventory is the inventory left over at the end of the accounting period. For manufacturers, purchases may mean the goods produced during the accounting period. For wholesalers and retailers, purchases refer to the inventory acquired within the accounting period. Purchases depend on the nature of your business. The Beginning Inventory is typically nill (0) if the business is newly established. This year’s Beginning Inventory = Last year’s COGS + Last year’s Ending Inventory – Last year’s Purchases You can ascertain Beginning Inventory by using the formula In an ongoing business, the Beginning Inventory usually is the Ending Inventory in the previous accounting period. Indirect costs include the cost of utilities like lighting, equipment costs, administrative salaries, and marketing. If the price stays the same as output changes, it is indirect.ĭirect costs include raw materials, packaging, distribution, and wages for labor directly involved in production. If the cost under consideration changes with the quantity of output, then it is a direct cost. The easiest way to tell direct and indirect costs apart is how they vary with the output level. This procedure lays out how to calculate COGS: Determine Direct and Direct Costs Nonetheless, you can still learn the essentials of calculating the Cost of Goods Sold yourself. Ideally, your COGS should be calculated by an accountant, as accuracy significantly impacts your tax liability and ability to plan for the future. Determining direct and indirect costs is not always easy, and you must find a way of telling them apart. Note that the cost for the inventory consists only of costs directly associated with the making of the product. Ending Inventory forms the Beginning Inventory for the next accounting period.
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