How to Calculate the Cost of Goods Available For Sale

Knowing how to accurately calculate the cost of goods available for sale is a critical accounting skill for any business that manufactures or sells products. As a business owner or accounting professional, you need this data to determine the value of your inventory and calculate your cost of goods sold and gross profit. In this comprehensive guide, I’ll walk you through the complete process step-by-step.

What is Cost of Goods Available For Sale?

The cost of goods available for sale refers to the total cost associated with the inventory you have on hand that is ready for sale to customers. It includes the cost of manufactured finished goods as well as purchased merchandise.

Specifically, it is calculated as:

• Beginning Inventory
• Plus Cost of Goods Manufactured
• Plus Purchases of Goods
• Less Purchase Discounts
• Plus Purchase Returns
• Less Purchase Allowances
• Plus Freight In

The resulting total represents the cost of all the goods you have available for sale during an accounting period. Subtracting the ending inventory gives you the cost of goods sold.

Knowing the total cost of goods available for sale is critical for properly valuing inventory and determining an accurate cost of goods sold figure. This in turn allows you to calculate your gross profit, which is sales revenue less the cost of goods sold.

Why Calculate Cost of Goods Available For Sale?

Here are some of the key reasons you need to accurately determine the cost of goods available for sale:

• Value inventory – You need to know the total cost of goods on hand to properly value ending inventory on the balance sheet. This helps avoid over or understating inventory

• Determine cost of goods sold – Subtracting ending inventory from cost of goods available for sale gives you your cost of goods sold for the period. The COGS figure is needed for the income statement

• Calculate gross profit – Gross profit is sales revenue less cost of goods sold. Without an accurate COGS figure, gross profit will be misstated.

• Assess sales margins – Gross margin is gross profit divided by revenue. Cost of goods sold impacts margins.

• Analyze product profitability – Knowing the cost of goods available for sale allows you to determine the profitability of individual products.

• Plan purchasing – Understanding costs of goods helps guide future inventory purchasing decisions.

• Accounting compliance – Calculation of cost of goods available for sale is needed to comply with GAAP accounting.

How to Calculate Cost of Goods Available For Sale

Follow this 7-step process to accurately calculate the cost of goods available for sale:

Step 1: Identify Beginning Inventory

• The beginning inventory is the prior period’s ending inventory balance.
• It represents the cost of goods that were available but unsold last period and are now available for sale in the current period.
• You can find this balance on last period’s balance sheet.

Step 2: Determine Cost of Goods Manufactured

• For manufacturing firms, calculate the total manufacturing costs incurred to produce finished goods during the period.
• Include direct material, direct labor, and factory overhead costs.
• The sum of these costs equals the cost of goods manufactured.

Step 3: Calculate Purchases

• Calculate the total amount paid for merchandise purchased during the period.
• This includes all inventory items bought for resale.
• Include freight in costs if paying shipping.

Step 4: Subtract Purchase Discounts

• Subtract any purchase discounts received from suppliers to determine net purchases.
• Common discounts include 2/10 net 30 – a 2% discount if paid within 10 days.

Step 5: Make Adjustments

• Add back purchase returns made to suppliers.
• Subtract purchase allowances received from suppliers.
• Add freight in costs if not already included in purchases.

Step 6: Sum the Costs

• The total of beginning inventory, cost of goods manufactured, and net purchases of merchandise equals the cost of goods available for sale.

Step 7: Subtract Ending Inventory

• The ending inventory balance represents the goods still available and unsold at end of the period.
• Subtract this amount from the cost of goods available for sale.
• The remainder amount is the cost of goods sold for the period.

Below is an example walkthrough of the calculation:

• Beginning inventory: $100,000
• Cost of goods manufactured: $200,000
• Purchases: $50,000
• Less: Purchase discounts: $500
• Add: Purchase returns: $1,000
• Less: Purchase allowances: $2,000
• Add: Freight in: $1,000
• Cost of goods available for sale: $350,500
• Ending inventory: $60,000
• Cost of goods sold: $290,500

Cost of Goods Available for Sale Calculation Tips

Follow these tips for an accurate cost of goods available for sale calculation:

• Use updated costs – Make sure to use the most recent cost data, not outdated historical costs.
• Verify accuracy – Double check the numbers for beginning inventory, purchases, and manufacturing costs.
• Watch timing – Use numbers aligned to the proper time period being analyzed.
• Check classifications – Be sure all costs relate to finished goods, not works in progress.
• Analyze ending inventory – Review the ending balance for obsolete or impaired inventory.
• Document returns – Keep records of all purchase and sale returns impacting available inventory.
• Track allowances – Detail any allowances from suppliers that offset purchase costs.
• Include all freight – Add in freight for goods purchased, manufactured, and/or returned.
• Check discards – Account for scrapping any inventory deemed not sellable.
• Use proper software – Use inventory management software to automate the data collection.

Accurately calculating the cost of inventory available for sale takes a careful eye for detail. Follow the steps outlined here and apply the tips provided to help avoid errors. Taking the time to get this inventory costing right leads to reliable financial reporting numbers business owners can actually use to make sound strategic and operational decisions.