Calculating the cost of goods sold (CMV) provides accountants and administrators with an accurate estimate of the company's profit. The CMV can be represented in a number of ways, although it is advisable for the company to choose one method and use it each year. Continue reading the article to find out how to calculate a company's COGS using the PEPS (first in, first out), LIFO (last in, first out) and weighted average cost methods. Just follow the steps below.
Method 1 of 3: Using the PEPS Method
Step 1. Count the starting and current stock
- The PEPS method assumes that the first products will be the first to be sold.
- Suppose you add 10 items to inventory on Monday that cost $3 each and another 10 items that cost $4.50 each on Friday.
- Also, assume the ending inventory shows that 15 items were sold on Saturday.
Step 2. Subtract the quantities sold from the beginning stock with the earliest date and multiply them by the cost price
- The COGS will be 10 x R$3.00 = R$30.00 plus 5 x R$4.50 = R$22.50, which results in R$52.50.
- The CMV is lower than the PEPS result and the profit grows as the inventory cost increases.
Method 2 of 3: Using the UEPS method
Step 1. Sort merchandise purchases by the most recent purchases
The UEPS method works on the basis that recently purchased items will be the first to be sold
Step 2. Record the value of products sold
- Using the same PEPS scenario, the CMV will be all 10 items purchased for R$4.50 (R$45.00) plus 5 of the products purchased for R$3.00 (R$15.00), which results in a total of $60.00.
- The UEPS method will provide a lower CMV and a higher profit when the cost of the products has descending costs.
Method 3 of 3: Using the Weighted Average Cost Method
Step 1. Add up all inventory purchase amounts for a single product type and divide by the number of items purchased
The result will be the average cost.
Step 2. Multiply the average cost by the difference between closing and starting inventory
- Most companies use this method to record the quarterly cost of goods.
- The total spent on products is R$75.00. When divided by the 20 products sold, the individual cost of the product will be R$3.75. The total COGS using this method is R$56.25 (15 x R$3.75).
- Small businesses and those dealing with unusual goods may need to use a more effective cost of goods calculation method to calculate CMV.
- The Accounting Principles decree the functions of the methods to be used in calculating the CMV. Publicly traded companies must submit financial reports based on the Principles and therefore it is important that they calculate the CMV and report the method that works best for the company. Switching methods is not recommended.
- There are other accounting transactions that can influence CMV. Return of purchases and loss of goods through theft or damage will reduce or increase COGS, for example, but may not indicate a change in inventory.