COGS calculator

How do you calculate cost of goods sold?

Start with what you had, add what you bought, and take away what is left: cost of goods sold = opening inventory + purchases + carriage inwards - returns outwards - closing inventory. Purchases, carriage inwards and returns outwards together are net purchases. Opening inventory plus net purchases is the cost of all the goods the business could have sold in the period; whatever is still on the shelves at the end was not sold, so its cost comes off.

The calculator opens on a business with $40,000 of opening inventory. It buys $250,000 of goods, pays $5,000 to have them delivered and sends $3,000 back to suppliers, so net purchases are $252,000 and goods available for sale are $292,000. The year-end count finds $50,000 still in stock, which makes cost of goods sold $292,000 - $50,000 = $242,000. Against sales of $400,000 that is 60.5% of revenue, the COGS percentage, and it leaves gross profit of $158,000.

Worked example: a trading account set out for an exam

A trading account shows the same sum in two columns: the inner one builds cost of goods sold, the outer one carries the totals. Here is a business reporting in pounds, with sales of £152,000 and £3,000 of goods returned by customers:

Gross profit of £56,300 on net sales of £149,000 is a gross margin of 37.79%. Average inventory is (£18,500 + £21,300) / 2 = £19,900, which covers 78.4 days of cost of goods sold. Enter these figures with the currency set to GBP, and put the returns inwards under Sales returns, to see the same layout under the result.

What counts as purchases, carriage and returns?

• Purchases are goods bought to sell on, or materials for the goods you make. Equipment, rent and wages for the sales team are expenses or assets, not purchases.
• Carriage inwards is the cost of getting goods in. IAS 2, the IFRS standard on inventories, includes in cost all costs of purchase and of conversion, plus other costs of bringing inventories to their present location and condition, which is why delivery inwards belongs in cost of goods sold.
• Carriage outwards, delivering goods to customers, is a selling cost. It goes below gross profit, not into the trading account.
• Returns outwards are goods sent back to suppliers, so they reduce purchases.
• Returns inwards are goods customers send back, so they reduce sales, not cost of goods sold.
• Sales tax or VAT that the business can reclaim is left out of purchases, just as tax charged to customers is left out of sales.

A manufacturer adds a further layer: its cost of goods sold also carries production labor and factory overheads, the costs of conversion, which this calculator expects you to include in purchases if you want them in the answer.

How does closing inventory change cost of goods sold and profit?

One for one, in opposite directions. Closing inventory is subtracted, so every extra dollar counted lowers cost of goods sold by a dollar and raises gross profit by the same dollar. On the default figures, a count of $60,000 instead of $50,000 cuts cost of goods sold to $232,000 and lifts gross profit to $168,000, taking the gross margin from 39.5% to 42%. With no closing inventory at all, cost of goods sold would be the full $292,000 and gross profit $108,000. The second chart under the result plots that straight-line trade for your own figures.

That is why the year-end count is checked so carefully. An error also flows into the next year, because this year's closing inventory is next year's opening inventory. Overstate the count by $10,000 and this year's gross profit is $10,000 too high; next year's opening inventory is then $10,000 too high, its cost of goods sold $10,000 too high and its gross profit $10,000 too low. Over the two years the total is right, but each year's figure is wrong.

FIFO or weighted average: how does the cost formula change COGS?

The count tells you how many units are left; a cost formula decides what each one cost. The IFRS Foundation's summary of IAS 2 says inventories are measured at the lower of cost and net realizable value. It assigns cost by specific identification for items that are not ordinarily interchangeable, and by first-in, first-out (FIFO) or weighted average cost for items that are. Take a product line that opens with 100 units at $10, buys 200 at $12 and then 100 at $13, and sells 300 units at $20 each at the end of the period:

The goods available cost $4,700 either way; the formulas only split it differently between cost of goods sold and closing inventory. With prices rising through the period, FIFO leaves the newest, dearest units in inventory, so it shows the lower cost of goods sold and the higher profit, here by $125. Work out closing inventory under the formula you use, then enter it in the calculator.

How do you get gross profit, gross margin and markup from COGS?

Gross profit is net sales less cost of goods sold. Divide it by net sales for the gross margin and by cost of goods sold for the markup. On the default figures, $158,000 / $400,000 = 39.5% margin and $158,000 / $242,000 = 65.29% markup: the same profit, measured against a different base. COGS as a share of sales is the other half of the margin, 60.5% here, since the two always add up to 100% of net sales.

A worked example in dirhams: a retailer opens the year with AED 120,000 of inventory, buys AED 860,000 of goods and ends with AED 140,000. Cost of goods sold is AED 120,000 + AED 860,000 - AED 140,000 = AED 840,000. On sales of AED 1,350,000, gross profit is AED 510,000, a gross margin of 37.78% and a markup of 60.71%. For margins further down the income statement, the profit margin calculator takes cost of goods sold as its cost of sales line.

How do you calculate inventory days and inventory turnover?

Both compare inventory with cost of goods sold, because inventory is held at cost. Inventory days = inventory / cost of goods sold x 365 says how long the goods sit before they are sold. Inventory turnover = cost of goods sold / inventory says how many times the stock is sold and replaced in a year. The two are reciprocals: 365 divided by one gives the other.

Average inventory smooths out a year-end that is unusually high or low; closing inventory is the figure a single balance sheet gives you. Choose the basis under Inventory days based on, and keep it the same when you compare periods. Inventory days feed straight into the cash conversion cycle, which the working capital calculator builds.

How do you calculate COGS in Excel or Google Sheets?

Lay the trading account down one column. With opening inventory in B1, purchases in B2, carriage inwards in B3, returns outwards in B4 and closing inventory in B5:

• Cost of goods sold: =B1+B2+B3-B4-B5, which returns 242000 for the default figures.
• With sales in B6 and the COGS formula in B7, gross margin: =(B6-B7)/B6, which returns 39.5% when formatted as a percentage.
• COGS percentage: =B7/B6, which returns 60.5%.
• Inventory days on average inventory: =AVERAGE(B1,B5)/B7*365, which returns about 67.87.

Google Sheets accepts the same formulas. For a reusable template, keep the inputs in one block and the formulas in another, and link next period's opening inventory to this period's closing cell so the two can never disagree.

Common cost of goods sold mistakes

• Adding closing inventory instead of subtracting it. Closing inventory is what was not sold.
• Putting carriage outwards in cost of goods sold. Delivery to customers is a selling expense.
• Taking returns inwards off purchases. They reduce sales; returns outwards reduce purchases.
• Valuing inventory at selling price. Inventory is held at cost, or at net realizable value when that is lower.
• Using sales instead of cost of goods sold for inventory days. Inventory is at cost, so the ratio needs a cost figure too.
• Breaking the link between periods. This year's opening inventory has to equal last year's closing figure.
• Confusing margin with markup. A 39.5% margin and a 65.29% markup describe the same default gross profit.

What the COGS calculator leaves out, and a glossary

It works one period at a time from totals you supply. It does not cost individual units, apply a cost formula, count inventory or test it against net realizable value, and it treats every purchase figure as already net of reclaimable sales tax. A manufacturer's labor and overheads go in only if you add them to purchases. For the quantity to order rather than the cost of what was sold, see the EOQ calculator.

Cost of goods sold (COGS): the cost of the inventory sold in the period, also called cost of sales. Inventory: goods held for sale, at cost or net realizable value if lower. Net purchases: purchases plus carriage inwards less returns outwards. Goods available for sale: opening inventory plus net purchases. Gross profit: net sales less cost of goods sold. Net realizable value: estimated selling price less the costs of completing and selling. Trading account: the part of the income statement that runs from sales to gross profit.

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Courses related to inventory and cost of sales

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