After each month, one of the accounting tasks that you must undertake for your business or enterprise is to calculate the cost of goods sold. This will allow you to assess how much profit you have earned from the previous month, and can be used to streamline your production and to check for parts of the production process that can be improved for better profit. Here’s how.
Beginning inventory. Start by identifying the beginning inventory. The beginning inventory will cover the month whose costs of goods sold you are trying to compute for. The beginning inventory is usually found by locating the last inventory item from the previous month. This last inventory item from last month’s inventory will serve as the starting point for your month’s inventory.
Materials. Next, you need to consider the materials that were used in the production process. Keep in mind that the type of industry where you belong as well as the specific types of goods and services that you render will be key in identifying the costs of the goods sold. Therefore, there are some businesses that are heavily reliant on materials, especially if the business is engaged in actual manufacturing. In some cases, however, the materials are minimal especially if the company offers services mostly. In this case, the only materials that can be included are side expenses such as the cost of running the office, the materials for the office supplies, and other basic office items.
Labor. Next, determine the labor cost for your production process. In some cases, the production line is heavy with labor costs especially if your business firm or company is focused mainly on providing services. Keep in mind that the labor expenses for your company includes not only the wages that you pay to your base employees, but also the expenses that you pay to their supervisors and every other member of the company, including the janitors and clerical staff. Apart from the actual wage, you should also include the social security expenses, employer taxes, and the benefits that you need to provide for the employees. This should all be added to the labor cost.
Total of goods for sale. To find the total for the goods that were placed on sale for the month, you need to add the materials cost and the labor cost. The materials and labor cost that you will use to derive the total for the goods on sale should start on the month’s starting point for the inventory.
Cost of goods sold. Finally, to get the cost of the goods that were sold, you should subtract the value of the total goods for sale from the inventory sales from the month that you are calculating.
When looking for the cost of goods sold, it is important to remember that this is only one of the primary costs in production that you have incurred. This is not yet the total net profit, since the net profit must incorporate other deductions, such as advertisement costs and other expenses that indirectly were used to boost sales or create goods.