Why Calculate The Cost Of Goods Sold
A business that buys or manufactures products to sell will have to calculate the cost of goods sold. It is a required part of filing a your tax return. The cost of goods sold is the cost involved in selling a product. The cost of goods sold affects the amount owed on taxes, so it is really important to get it right. The process to calculate the cost of goods sold can be confusing, especially if multiple products are sold. Here we’ve described how to best calculate the cost of goods sold.
Important To Remember When Calculating COGS
Working with a CPA is always best when to calculate the cost of goods sold. There are several things needed to calculate the cost of goods sold:
- The cost of inventory at the beginning of the year. This includes merchandise in stock, raw materials, work in progress, and supplies. The inventory at the beginning of the year, must the inventory at the end of the year for the previous year.
- The cost of inventory purchased during the year. This includes any inventory added throughout the year. It is important to keep track of each shipment, or the total manufacturing cost of each product added to the inventory during the year.
- The cost of inventory at the end of the year. This is calculated by taking an inventory or estimate of the products. Damaged, worthless, or obsolete inventory may be deducted from end of year inventory. Damaged inventory can be estimated, while worthless inventory requires proof that it was destroyed. A decrease in value must be shown for obsolete items.
The basic formula is:
This process allows businesses to deduct all of the costs of the products sold, regardless of if they manufacture them themselves or purchase them for resale. There are two types of costs that must be determined in order to calculate costs of goods sold, Direct and Indirect.
Direct costs can be calculated by calculating: the cost to purchase product, the cost to purchase raw materials to manufacture product, the cost to package, work in process, supplies for production, cost of inventory of finished product, and overhead costs of production. This includes facilities costs, which involve rent, mortgage interest, and utilities. A percentage of facility costs will be allocated to each product for the tax year.
Indirect costs are calculated by calculating: the cost of labor, the cost of storage, and depreciation of equipment and supplies used to manufacture products.
Here is the step by step guide to calculate the cost of goods sold:
- Determine direct and indirect costs.
- Calculate the facility costs.
- Determine the beginning of the year inventory.
- Factor the cost of adding inventory during the year.
- Determine the end of year inventory.
- Use the basic formula to calculate the cost of goods sold.
Inventory at beginning of the year + Inventory purchased during the year – Inventory at the end of the year = COGS(cost of goods sold)
Always Consult A Professional For Your Accounting
To insure the best possible outcome when filing taxes, it is always best to work with a professional. As a result, the proper procedures and valuation processes will take place and the correct forms will be utilized. The process and forms to calculate costs of goods sold varies depending on the type of business. In addition, working with a professional accounting specialist can help businesses avoid unnecessary problems with the IRS, as laws can vary in different jurisdictions. In addition, a tax professional will know how to save their clients the most money on their taxes. Contact Tax Hack today to schedule a free strategy session!