COGS Calculation Methods
3. Choosing the Right Approach for Your Business
Here's where things get a little more interesting. There are three main methods for calculating COGS: FIFO (First-In, First-Out), LIFO (Last-In, First-Out), and Weighted Average. Let's break them down.
FIFO (First-In, First-Out): This method assumes that the first units you purchased are the first units you sold. It's like rotating your stock — using the oldest items first. This is generally the most straightforward and intuitive method, and it's often a good choice if your inventory turnover is relatively fast. The formula is relatively straightforward when tracking in excel. You simply deduct the costs of the older items first when calculating COGS.
LIFO (Last-In, First-Out): This method assumes that the last units you purchased are the first units you sold. This method is less common and is not permitted under IFRS (International Financial Reporting Standards). It can be useful in situations where prices are rising, as it can reduce your taxable income. Again, you track your units in excel, but with a twist. You deduct cost of the latest items in stock.
Weighted Average: This method calculates a weighted average cost for all units and uses that average cost to determine COGS. The formula is: Weighted Average Cost = (Total Cost of Goods Available for Sale) / (Total Units Available for Sale). This method is a good choice if your inventory consists of similar items with fluctuating prices. It smooths out the impact of price changes on your COGS calculation. In Excel you just need to have a weighted average cost column, then do basic math operations to the coresponding columns (units sold weighted average costs).
Choosing the right method depends on your specific business and industry. Consider the nature of your inventory, the frequency of price changes, and the accounting standards you need to comply with. Consult with an accountant if you're unsure which method is best for you.
Putting It All Together: COGS Formulas in Excel
4. Step-by-Step Guide to COGS Calculations
Now for the fun part — using Excel formulas to calculate COGS! Let's start with a simple example using the FIFO method. Suppose you purchased 100 units at $10 each and then 50 units at $12 each. You then sold 80 units. Under FIFO, you would calculate COGS as follows: (80 units $10) = $800. This means your COGS for those 80 units is $800.
For the weighted average method, you would first calculate the weighted average cost: ((100 units $10) + (50 units $12)) / (100 + 50) = $10.67 (rounded). Then, you would multiply the number of units sold by the weighted average cost: (80 units $10.67) = $853.60. This would be your COGS.
In Excel, you can create formulas to automate these calculations. For example, if your Units Sold are in cell C2 and your Weighted Average Cost is in cell D2, your COGS formula would be simply: `=C2D2`. And if you have individual purchase and sales listed, you can use SUMIF or similar function to calculate the cost using FIFO or LIFO.
Remember to regularly update your spreadsheet with new purchase and sales data. The more accurate your data, the more accurate your COGS calculation. And don't be afraid to experiment with different formulas and formatting options to find what works best for you. Excel is a powerful tool, so use it to your advantage!
