Cost of goods consumed

What it is and why it matters

Of all the figures in the income statement, the hardest to get is the cost of goods consumed (or sold). It's worked out from two inventory counts and the purchases of the period.

Regular inventories also help you spot shortages, plan purchases, reduce spoilage and apply FIFO (first in, first out).

The formula

• COGS = opening inventory + purchases in the period − closing inventory

What each value means

Opening inventory

The stock counted and valued at the start of the period.

Purchases in the period

Everything that came into the business during the period.

Closing inventory

The stock counted at the end of the period, valued with the same method.

Step by step

1. Count the stock at the start of the period and value it.
2. Add the purchases of the period.
3. Count the stock at the end of the period and value it with the same method.
4. Subtract the closing inventory from the previous sum.

Worked examples

Study notes

• Tip

  If you compare what was consumed according to inventory with what was recorded in orders or invoices, you'll spot shortages, leaks or errors worth investigating.

• Common mistake

  Use the same valuation method for both inventories; otherwise the difference doesn't reflect actual consumption.