Let’s say your wool sock company has a beginning inventory of $50,000 for the year. If you have a bigger operation, you’ll perform spot checks on your stock. If you have a smaller business, you will physically count everything that’s leftover. Ending inventory: The value of what’s left over at the end.Inventory purchases made (during the reporting period): The value of what you added throughout the year.This should be the exact same number as your ending inventory from the previous reporting period. Beginning inventory: The value of the product you started with.The three numbers involved in your COGS calculation are: + Inventory Purchases Made During the Reporting Period Then, voila! You are ready to calculate your COGS. When you have a clear picture of the total cost of your inventory, next you look at how much you actually sold. Once all this is factored in, you know the total cost of your inventory. You buy them from a distributor for a certain price, but in order to determine the cost of your inventory, you also need to factor in shipping them from the factory to the warehouse, storing them, repackaging them, etc. Let’s imagine your small business sells wool socks. They can look at complex things like rent, mortgage interest and utilities, and figure out how to assign a percentage to each of the products in your inventory. The IRS has a long article about COGS, but it’s always a good idea to consult a CPA to ensure you’re not missing out on any deductions. What you can and can’t include when calculating inventory costs will vary by industry and product. Equipment used for administrative work during production.Salaries of administrators or managers overseeing production.Depreciation of equipment used to produce, package or store the goods.There are also some less obvious costs to consider that could help to lower your tax bill: Freight in and out (but not shipping to a customer).Utilities and rent for your manufacturing facility.Labour costs for anyone who worked on the goods during production.Here are common costs to include when valuing your inventory: To figure this out, you need to add up all the costs that you incurred getting your product ready to sell to your customer (if you use Bench, we’ll do this for you).

First, you need to know the value of your inventoryīefore you can calculate your COGS, you need to know the value of your inventory. That alone is reason enough to calculate COGS. Gross margin is one of the most helpful numbers to study it can tell you whether your prices are too low, or if you’re spending too much on production. With this number, you can calculate gross margin-how much money you’re making from each product you sell. When you subtract COGS from revenue, you’re left with your gross profit-revenue, minus the cost of sales. Your COGS can also tell you a lot about the overall health of your small business. The more eligible items you include in your COGS calculation, the lower your small business tax bill. It’s the sum total of the money you spent getting your goods into your customer’s hands-and that’s a deductible business expense. Cost of Goods Sold is important for your taxes.

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