![]() ![]() When talking about an automobile business, there are high chances that the selling figures might fluctuate at the end of the year.The gross profit is a profitability measure that shows how well a business can manage its labor and supplies in the production process. The COGS is a vital metric that is displayed on your financial statements as it is the only figure that gets subtracted from the business revenue to get its gross profit.Now, with the cost of goods sold statement in your hands, your gross income will be $75,000 – $23,000 = $52,000. Now, this figure will help you with fair decisions, choosing vendors with direct material prices, etc.Īs the COGS is calculated, this can also help you to calculate your yearly gross income. The cost of goods sold equals $23,000, as calculated. Now, let’s try to find the Cost of Goods Sold for the entire year by calculating with our formula.ĬOGS = Beginning Inventory + Purchases made during the period – Ending Inventory At the end of the calendar year, the ending inventory proved out to be worth $4,000. ![]() While the sales were on, the retailer realized that the business might need an additional inventory worth $7,000. The beginning inventory cost was $20,000. Now, the beginning inventory was recorded on 1st January and the ending inventory was recorded on 31st December. Let’s assume that ‘x’ business uses the calendar year to record their inventory. ![]() Now that you know the importance of calculating the COGS, let’s learn how to calculate COGS using a formula. If the prices are lower than your competitors then also you will incur loss since you are having a low-profit margin.Hence, COGS indirectly helps you in selling your product at the right price that can get you more sales and thereby, also help in earning profit. In such a situation, if your prices are high in the market then nobody will purchase your product and you will incur a loss. Chances are that you might have added more profit margin or less in comparison to your competitors in the market. Once you know the exact purchasing amount and thereafter deciding your profit margin is not an ideal strategy. Helps in comparing the market value of your product with your competitors.So knowing the amount you have spent in getting the products to be sold you can arrive at actual expenses by including other costs incurred in the overhead i.e. Your balance sheet needs to list all your expenditures and incomes. Now, this is more of an accounting thing but none the less it is important. Helps in determining the actual expenses in obtaining the products.Hence, knowing COGS helps you in determining how much profit margin you can keep on the products you sell. ![]() Once you know the amount in which you have purchased the product, you will be in a better position to judge the price at which you would like to sell the product so that you can not only cover your expenses but also earn profit from it. Here are some of the benefits of knowing Cost Of Goods Sold (COGS).įirstly, your selling price can be determined by knowing the total expense you have made in procuring the products. Therefore, it becomes an important part of his finances. A business person can earn profit only when he knows his exact expenses and incomes by selling his/her goods.Ĭost of Goods Sold gives the idea to a business person about his expenditure in procuring the material he wants to sell. The primary motive of starting any business is to earn a profit. ![]()
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