Cost of Goods Sold (COGS) is the total of all the costs that go into producing a product. Calculating this value can become complicated depending on the number of different products you produce and the costs associated with producing each.
The basic COGS calculation is:
Value of Inventory at the Beginning of the Year +Additional Inventory Cost(inventory purchased throughout the year) -Inventory at the End of the Year =Cost of Goods Sold
In order to use the calculation, you must calculate and measure the values within the calculation. Here is the 6-step process:
Step 1: Calculate Inventory at the Beginning of the Year
This inventory includes:
Merchandise in stock
Step 2: Determine Product Costs per Year
These are all costs that go directly into production or purchasing of a product:
Cost to buy raw materials (seeds, livestock, dairy, flour, etc.)
Cost of buying products for resale (if you are a food hub)
Cost of delivery to get materials/products
Step 3: Determine Production Costs
These are all costs that indirectly go into production or purchasing of a product:
Cost of equipment to produce or package goods
Depreciation and maintenance of equipment
Cost of labour and employees
Software/programs used for administration
Step 4: Determine Facility Costs
These are all costs that goes into maintaining and use of your facilities:
Rent or mortgage
Cost of maintaining land or facilities.
Step 5: Determine Inventory at the End of the Year
The final value to be determined is your inventory at the end of the business year. The easiest way to determine this value is to take physical inventory. Any lost or worthless inventory should not be included in this value as it can not be sold.
Step 6: Do Your Calculation
After you have collected all of the values from the steps listed above, you are ready to do your COGS calculation. For example:
$20,000(inventory at the beginning of the year) +$15,000(product costs + production costs + facility costs) -$30,000(inventory at the end of the year) =$5,000(COGS)
Are you a farmer or food producer and want to keep you inventory, orders, customers, and sales channels synced? Sell direct to customers and manage your business all in one place with Local Line.