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# How To Calculate Cost Of Goods Sold (COGS) In Easy Way

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Do you hard to understand the Cost of Goods Sold flow and its calculation? Not only you, many times we are not given a simple and easy way on how to calculate Cost of Goods Sold right away. Try this way, it may easier as I found it so.

It’s not a rocket science indeed, it is only a matter of moving end calculation of each part (section) to the top of the next part (section). A visual chart may explain better than words, yet, easier to remember. So here is the calculation flow chart:

Explanation:

Part-1: Direct Material Usage Calculation

To calculate direct material usage, you need the following information (read: numbers):

1. Direct Material Beginning Balance: On the beginning of a book, you will have beginning balance of “Direct Material Beginning Balance”, it is on the Balance Sheet. If you have not constructed an opening balance sheet, you can find the number on the balance sheet of the previous book. Put this on the top of the section.
2. Direct Material Purchase: This is value of all direct material purchased during the current book period. Note: Don’t forget to include the inbound freight, purchase return and discount in it.
3. Direct Material Ending Balance: This is value of the direct material ending balance after it is used for making the product during the book period.

Have a look the above chart for calculation

Part-2: Product Cost Calculation

To calculate product cost, you need the following information (read: numbers):

1. Direct Material Usage: This number comes from part-1 (see the above chart).
2. Direct Labor Cost: This is the total wages (paycheck) for employees who involved in the process of making the product. They are usually paid by unit product or hours.
3. Manufacturing Overhead: This is total cost incurred to make the product other than the Direct Material and Direct Labor (i.e.: Depreciation of Machineries, Factory Maintenance, Electricity used in the Production, etc.).

See the above chart for calculation
Part-3: Cost of Goods Manufactured Calculation

To calculate cost of goods manufactured, you need the following information (read: numbers):

1. Total Product Cost: This number comes from Part-2.
2. Work In Process (WIP) Beginning Balance: You can get this number from balance sheet of previous book.
3. Wok In process (WIP) Ending Balance: This is value of the work in process ending balance after it is used for making the product during the book period.

Have a look the chart for calculation

Part-4: Cost of Goods Sold Calculation

This is the last part. To calculate the cost of goods sold, you need the following information:

1. Cost of Goods Manufactured: This number comes from Part-3.
2. Finished Goods Beginning Balance: You can get this number from balance sheet of previous book.
3. Finished Goods Ending Balance: This is value of finished goods ending balance after it is sold.

Have a look the chart for calculation.

I hope you find it is useful, and gives an easier understanding on how to calculate cost of goods sold.

1. laalbane

Sep 15, 2008 at 6:50 pm

Very useful! Thank you

2. zulfiqarmba

Sep 27, 2008 at 3:25 pm

Thanks, very nice way to understand the Term.

3. moddie2006

Oct 31, 2008 at 7:23 pm

thank…this made it much easier to understand!

4. Jan 5, 2009 at 6:36 am

great made it very easy for me who was finding ways to teach this subject

5. ou channak

Jan 21, 2009 at 12:42 pm

thank it is so good way that can make u to understand.

6. Jan 22, 2009 at 6:26 am

can i use this for my class?

7. Jan 22, 2009 at 11:17 am

I am glad you guys find it useful.

@Khusi: you are allowed to use it for your class. However, I would suggest you to enrich this techniques with more explainations and Cost of Goods Sold real case study (example) from a real business. And you may want to mention this site (blog) with its url [http://accounting-financial-tax.com] as your staudents may find more accounting, financial and taxation topics here.

8. Apr 6, 2009 at 5:57 am

It is really good. But I want to know how to calculate the cost of Finished goods (Detailed Explaination). I would be really thankfull if you can help me out.

9. ken

Apr 8, 2009 at 4:47 am

nice article…

but how about COGS Calculating in an Assembly Company ?

and I heard alot about job costing, can u tell us what is it all about and give some example..

ths alot
ken

10. Jan 27, 2010 at 12:23 pm

it is very good …thanks

11. Feb 8, 2010 at 5:14 pm

I am in need of help calculating the comparison of variable costing and absorption costing. see below

Units sold 1,400
Units produced 1,600
Direct labor \$4,200
Direct materials used 3,500
Selling and administrative expenses (all fixed) 700
Beginning inventories 0
Contribution margin 5,600
Direct-material inventory, end 800

There are no work-in-process inventories.
1. What is the ending finished-goods inventory cost under absorption costing?
2. What is the ending finished-goods inventory cost under variable costing?

12. hhumas

Aug 12, 2010 at 2:35 pm

thanks dear..

13. Lea Naquila

Sep 22, 2010 at 8:06 am

nice!!! thankz 8’s help me a lot to solve my problem… god bless

14. Mar 25, 2011 at 3:42 am

Thank you, It does help to visualize the process and connect the dots.

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