How to Calculate Cost of Good Sold


After the Purchase Budget, and the Ending Inventory Budget has been developed, the next step is to Develop your "Cost of Goods Sold Budget".

If you are establishing a business that transfers ownership of goods/products, from your business to the customer, you will be required to calculate Cost of Goods Sold (COGS). A bicycle rental company, for instance, only "rent" bicycles to customers; they do NOT transfer ownership to them. As a result, the bicycle rental company would not be required to calculate a "Cost of Goods Sold".

Most businesses, however, DO transfer product ownership to their customers . For instance, a retail clothing store would purchase clothing from its supplier and sell it to their customers (You & I). After we, as consumers, purchase the clothing, we own it and we do not have to give it back to the clothing retailer. In other words, ownership of the clothing is passed on to us. Therefore, a clothing retailer, and all other types of businesses that transfer product ownership to their customers, will have to calculate a "Cost of Goods Sold".

The Cost of Goods Sold is a term many find confusing. To better understand its meaning, many accounting instructors suggest their students substitute the word "Goods" with the word "Products". When students perform the substitution, they arrive at the term "The Cost of Products Sold". It should seem more clear now. Cost of Goods Sold refers to the total cost of all the product sold. Therefore, the Cost of Good Sold Budget forecasts the total cost of all the product you plan to sell during each forecasted business year.

For instance, if your business year end is December 31, and your forecasting periods are 200X, 200Y, and 200Z, then the Cost of Goods Sold Budget will be used to determine the total cost of all the product sold as of December 31, 200X, as of December 31, 200Y, and as of December 31, 200Z.

Since retailers and manufacturers are distinct in nature, we have organized this section in Two Parts; namely:


Categories: Forecasting