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![]() How do you calculate cost of goods sold COGS?Īt a basic level, the cost of goods sold formula is: Starting inventory + purchases − ending inventory = cost of goods sold The next sections will cover specifics on calculating COGS based on inventory method. Doing so allows optimum pricing, inventory valuation, and profitability analysis in QuickBooks. Properly tracking COGS is crucial for inventory-based businesses. Improved Financial Reporting: Accurate COGS lead to true gross profit, allowing better insights into production costs and operating performance. Reduced Tax Liability: Overstating COGS reduces taxable income so it's imperative to capture proper costs to avoid IRS scrutiny. This ensures prices both cover true costs and remain competitive. There are a few important reasons why properly calculating COGS is critical for any manufacturing, wholesale, or distribution company:īetter Pricing Decisions: Understanding accurate COGS allows you to set optimal pricing to achieve target gross margin goals. Tracking COGS accurately allows you to value remaining inventory properly and determine the actual gross profit from sales. Simply put, it's the cost to actually make the stuff you sell. ![]() This includes the cost of materials, direct labor, and overhead costs directly related to production. Defining Cost of Goods Sold (COGS)Ĭost of Goods Sold (COGS) is the direct costs attributable to the production of goods sold by a company. This guide will provide an overview of what COGS is and the key reasons to calculate it correctly in QuickBooks. Tracking COGS allows you to properly value inventory, analyze pricing decisions, optimize cash flow, and reduce tax liability. Introduction to Calculating COGS in QuickBooksĬalculating Cost of Goods Sold (COGS) accurately is critical for understanding the true profitability of your business in QuickBooks. You'll also discover best practices for maintaining accurate COGS over time through periodic reconciliations. In this post, you'll learn step-by-step how to configure QuickBooks to automatically calculate COGS using purchase orders, bills, and sales receipts. Luckily, with the right setup you can accurately track COGS in QuickBooks without complicated inventory features. Tracking cost of goods sold (COGS) is critical for understanding profitability, yet many small businesses find calculating it in QuickBooks challenging.
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