In businesses, keeping a record of goods sold and products is necessary. Primarily, this data is used by the accounting and bookkeeping team to prepare an balance sheet. With the help of cost of goods sold tracking you can know your business stock, profit or loss percentage. Having a proper knowledge of cost of goods sold and inventory helps to better visualization the problems faced in the production process and join the management process to enhance production.
In this blog, you can learn about the cost of goods sold tracking (COGS) and complete process to calculate COGS to enhance the business production process.
What is COGS?
Cost of goods sold tracking refers to the total cost for the production of goods and selling them in the market. This mainly includes the cost of raw material, labor costs assigned, and other products that are used for production purposes. In COGS, the price and the expenditure of the raw material for the production process are included. It is mainly used to create a proper income statement of a business for a period. A proper financial report helps the owner to visualize the business working process and can take necessary steps to enhance productivity. Using the balance sheet, you can track which product is sold the most in a specific period.
Procedure to Calculate the COGS
For calculating COGS require a simple formula is mainly dependent upon the list and business conditions. The COGS can be calculated using a simple and easy method, that is:
COGS = Beginning Value + Purchase Value – Ending Value
Step 1: Collect all the necessary Inventory details
- The value of the Inventory at the start of your business.
- The price of the Inventory that is brought during the production process.
- Value of the Inventory at the compilation of your production process.
Step 2: Apply the simple COGS formula to calculate
One example of calculating the COGS:
Beginning Amount = $7500
Purchase = $5500
Ending Inventory = $4000
$9000 Value of Cost of Goods Sold ($7500 + $5500 – $4000)
Step 3: Now you have to choose a method and check how it affects the COGS process.
Step 4: The calculation of COGS tells the cost of goods sold during the accounting process. After this, you can know which one is affecting your profit and how you can stop it.
Why is Cost of Goods Sold Tracking is Important?
COGS plays a vital role in the production process. By watching the COGS report, the owner can make an important decision to manage the production cost, which is necessary to enhance the production process in the future. Some of the reasons why COGS is important for the business production process are:
- Profit or Loss Report: Calculating the cost of goods sold, the owner can get a proper idea of the money earned from the production process and the profit earned in the period.
- Budget Planning: A proper cost of goods sold report is essential to make a proper budget plan in the production process. After proper business planning manager can make a proper profit target in a period.
- Deduction of Tax: In some places, managers use the cost of goods sold tracking technique to reduce the tax amount, which helps in tax savings.
- Inventory Management: COGS can help to manage inventory like raw materials and the products that are used in the production process for their sale in the market.
How Assets Tracking Software Helps COGS?
Modern asset tracking software has been updated and can easily make a report related to the price of the goods and the amount sold in the market. Modern tracking systems provide many advantages compared to older software.
- Real-Time Product Value: With advanced software, you can know about the value of products at any point. You can easily know the slow-selling product in the market before you stop producing it. If any theft or unusual thing happens with product, you can easily track it. Using the proper COGS report, you can get a proper idea of the profit percentage.
- Automatic Price Estimation: An automatic method helps to track the value of the products, which helps to reduce the manual calculation of the data. When the new product arrives, it will automatically enter the price. Get a proper update on the movement of goods and the change in price.
- Enhanced the Correction by Software: The Presence of bar codes, tags will automatically collect the price and calculate it, which saves time and reduces errors that occur during the manual entry of data. It will enhance the speed of the bill creation process.
- Joining with the Business Financial System: The Integration process helps to directly collect all the information related to sales, purchase profit percentage so that it can create a proper financial report of the business. Creation of a financial report that contains the new price of the product helps to examine under the COGS term.
- Optimization of the Data: New tools help to get a detailed idea of optimizing the product levels. Based on the sales, try to forecast the most needed product in the future. Try to properly understand the pattern that would help the manager will sale the product or replace it.