Essential ideas of accounting and financial management include inventory and cost of goods sold (COGS).

Here are some details on inventory and COGS calculations :

Inventory

The products or resources that a business keeps on hand with the intention of selling them during regular business operations are reffered to as inventory. It may consist of unfinished products, work-in-progress items, and raw materials. The corporation makes an investment in its inventory, which locks up funds until the products are sold.

Typically, there are three categories of inventory:

i. Raw materials are the foundational components that are utilized to make products but have not yet undergone any processing.

ii. Work-in-progress (WIP) refers to products that are in various phases of manufacturing but are not yet final goods but are partially done.

iii. Products that have been finished and are prepared for sale to clients are referred to as finished goods.

Cost of Goods Sold (COGS)

The direct costs paid in creating or obtaining the products that a business sells during a certain accouning period are referred to as COGS. The costs of raw materials, direct labor, and overhead expenses directly related to the manufacture of the items are included. Because the gross profit is calculated by deducting COGS from sales revenue, COGS is a crucial number.

The parts of the formula are broken down as follows :

i. The value of inventory at the start of the accounting period is known as opening inventory. It comprises the price of the preceding period's unsold items.

ii. The cost of additional inventory that was generated or bought during the accounting period is referred to here.

iii. Products that have been finished and are prepared for sale to clients are referred to as finished goods.

Inventory value at the end of the accounting period is kmown as closing inventory. It contains the price of the inventory's still unsold goods.

You may calculate the cost of the products that were sold throughout the period by substracting the closing inventory from the total of the opening inventory and acquisitions.

Businesses must effectively manage inventory and calculate COGS in order to evaluate their profitability and make strategic decisions about pricing, production, and purchasing.