Calculate Cost of Goods Sold
The next line that is on the income statement is commonly called Cost of Goods Sold. Sometimes this is abbreviated as COGS but it means the same thing. These costs are what you spend to make or purchase your product for sale which can include raw material costs, salaries of the workers making the products and so on. We’ll dig into this using the Fish Shack example that we started when talking about total sales. In the following small business financial management example, we’ll calculate cost of goods sold for the company per month by first analyzing each of the products sold by the Fish Shack.
COGS of Fish and Chips
In the last lesson, we talked about the Fish Shack that offered two different types of foods: Fish and Chips and Sushi Rolls. Let’s start by calculating cost of goods sold for the fish and chips and then we can expand the example to include the sushi rolls. To make the fish and chips, the food stand needs two primary ingredients to make the meal which is a fish filet and potatoes for the chips (french fries). After looking at the average serving, we can estimate that each meal contains about 3/4 of a potato and one fish filet. We’ll also say that the company can buy fish fillets for $3 per filet and potatoes for $0.50 per potato from their food distributor. To make each fish and chips meal, it takes one of the food stand workers a total of 5 minutes and they are paid at $10 per hour.
From this information, we can calculate cost of goods sold for each fish and chips meal. First, we’ll put all of the information that we have in a spreadsheet like the one shown to the left. From there, we need to multiply the quantity used of each item to make a fish and chips meal and multiply it by the price per item.
Starting out with the fish filet and doing the same for the potatoes:
1 Filet per meal x $3 per Filet = $3.00 per meal
0.75 potatoes per meal x $0.50 per potato = $0.38 per meal
Calculating out the wages is a little trickier. We first have to convert the amount of time it takes someone to prepare the meal into hours since that is the unit our price per item is listed in:
5 minutes to prepare / 60 minutes per hour = 0.0833 hours to prepare
0.0833 hours to prepare x $10 per hour = $0.83 per meal
So now, all we have to do is add all three items together to get our total cost of goods sold for each fish and chips meal which comes to $4.21 per meal.
COGS of Sushi Rolls
Now we’ll go through the same exercise to calculate cost of goods sold for one sushi roll. The three main ingredients in one of the sushi rolls is sticky rice, fish and a seaweed sheet. Since the workers can make a number of sushi rolls at the same time, it only takes them 2 minutes to make each sushi roll.
The quantity and price of each item used to make one sushi roll is listed in the table on the left. By multiplying the quantity of each item by the price, we can get the cost of each ingredient used to make the sushi roll. Adding each cost up using the same method as above, we were able to find that the cost of goods sold for one sushi roll is equal to $1.48.
Calculating Total Cost of Goods Sold
In the last lesson, we said that the Fish Shack sold a total of 125 fish and chips meals and 75 sushi rolls per day. To calculate cost of goods sold per day for the fish shack, we can multiply the total number of each item sold by the cost of goods sold for each:
Daily Cost of Goods Sold = 125 fish and chips per day x $4.21 COGS + 75 sushi rolls per day x $1.48 COGS = $637.25 cost of goods sold per day
To find out the company’s cost of goods sold per month, we just need to multiply the last value by the number of days in the month. Saying this month had 30 days:
Monthly COGS = $637.25 x 30 days = $19,117.50 cost of goods sold per month
Key Takeaway: Cost of goods sold is a total of the costs required to make or purchase a product that will later be sold to customers which can include raw materials, wages of workers making the product, etc.
Cost of Goods Sold Explained