Recently my start-up business clients have been talking to me about how to price their items. Cost of goods, also known as COGS are the first step in making a fair determination of how you should price your items.
What Does COGS (COST OF GOODS SOLD) mean?
COGS, or Cost of Goods Sold, is the actual cost of the item you are selling. The cost is calculated by taking stock of all the supplies and materials used in making your item. Supplies and material include cost of materials, packaging, and shipping.
For example if you make dresses, the supplies and materials that can be calculated in your COGS are buttons, zippers, fabric, thread, the pretty paper you package it in, and the cost of shipping it to your sellers.
How Do I Calculate COGS?
Beginning Inventory + Inventory Purchases + End Inventory = Cost of Goods Sold
- Step One: Make an inventory list of all the items you have on hand.
- Step Two: Any new items you acquire during the year keep track of.
- Step Three: Make an inventory list at the end of the year.
- Step Four: Subtract that end of the year list from the inventory you started out with + what you acquired during the year = COGS
For example: $500 (beginning inventory of supplies) + $1000 (new supplies and materials purchased) – $800 (end of the year inventory of supplies) =$700 (the Cost of the Goods that you sold during that year).
COGS ARE BASED ON ASSUMPTIONS
Please be aware that COGS are based on certain assumptions. The calculation assumes that you sold the old inventory first and waited until that was gone to sell your new inventory. The calculation also assumes that the cost of goods did not change throughout the year, so you may have begun with lesser quality cotton and then decided to switch to organic or bamboo cotton when you acquired new supplies that are not necessarily taken into the calculation unless you make allowances for it.
Why Do I Need to Calculate COGS?
–If you do not know what your COGS are, then how can you accurately price the items you are selling online?
-They are tax deductible!
by Attorney Judith Elaine Hoover on 04/11/12
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