Retailers need to track the cost of goods sold (COGS) to ensure they are profitable and reporting expenses to the IRS correctly. Considering that 60% of small business owners feel they don’t have enough knowledge about accounting and finance, it’s a good idea to understand how COGS can impact your accounting and sales. This guide will walk you through what’s included in COGS, how to calculate it, and different ways to help prepare for tax season.
What is COGS?
Cost of goods sold (COGS) is the direct cost of producing products sold by your business. Also referred to as “cost of sales,” or “COGS report,” COGS includes the cost of materials and labor directly related to the production and manufacturing of retail products. COGS excludes indirect costs, such as distribution and marketing.
Benefits of Understanding COGS
Using COGS for your retail store is crucial for a number of reasons:
Understand…
cash flow Manage tax liability Ensure profitability Accurately price products and keep healthy margins What’s included in Cost-of-Goods (COGS)? Direct Costs vs. Indirect Costs Direct costs are expenses that are directly tied to the production of goods or services.
Indirect costs are expenses that cannot be directly attributed to the production of goods or services. COGS includes only direct costs.
Examples of Direct Costs Raw materials Labor costs directly related to production Packaging and shipping costs Manufacturing overhead How to Calculate COGS The formula for calculating Cost of Goods Sold for retail businesses is: COGS = Beginning Inventory + Purchases – Ending Inventory Beginning Inventory: The value of inventory at the beginning of the accounting period.
This can be found on your balance sheet for the previous period. Purchases: The total cost of all inventory purchases during the accounting period. Ending Inventory: The value of inventory at the end of the accounting period. This can be found on your balance sheet for the current period…
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