![]() One of the simplest ways to calculate the value of the cost of goods sold is as follows:Īdd the inventory at the start (of a certain time) to the purchases made (during that same time frame). The key objective of understanding the cost of goods that are sold is to understand the real cost of the inventory that is sold within a fixed time frame.Īlso Read: Learn About Safety Stocks How to Calculate the Value of Cost of Goods Sold? ![]() These types of direct costs are subtracted from the sales revenues to understand the total amount of gross profits to your business.Expenses related to depreciation in some cases.Costs for storage of the materials and products.Cost of labour employed to make those products.The cost of goods sold gives you an understanding of all the direct costs that are involved in the manufacturing of a product or service. Some of these are direct costs, while others are indirect costs. What is the Meaning of Cost of Goods Sold?Įvery product that is manufactured involves costs. Now divide the sales that have taken place by the average inventory you have calculated. Once you add them and get the total amount, divide them by two (2) to get the average inventory. You can also calculate inventory turnover in the following method:Īdd the inventory on hand at the start of a given time frame to the inventory on hand at the end of a given time frame. The average value of the inventory means the total inventory at a given point of time (minus) the total available inventory at the end of a given point of time. The cost of goods sold is self-explanatory. Inventory Turnover = Cost of goods sold / Average value of the inventory. The inventory turnover ratio formula is as follows: The Formula to Calculate Inventory Turnover Ratio The inventory turnover ratio is ranked above all other ratios because it enables a business to strategise in accordance with the results it computes. It could also mean you need to have more inventory ready on hand. If the turnover ratio is a fast-paced one, it implies your business is enjoying a good volume of sales. If the turnover ratio is a slow one, it implies that your business is experiencing poor sales. This is often calculated for a fixed duration of time. Have you always wondered about what is inventory turnover ratio ? It is a ratio that reflects the number of times your business has made a sale and replenished the sold products with fresh inventory. ![]() These decisions could be with regards to manufacturing, purchase of new inventory, pricing the inventory differently as well as devising new marketing strategies to develop the business further. These details about the turnover help you to make more appropriate decisions. Popularly termed the efficiency ratio, this ratio indicates if the volume of inventory exceeds the volume of sales. The inventory ratio formula involves dividing the value of the products sold by the average or total inventory. ![]() This ratio helps you to monitor the volume of stocks sold and the number of times the sold stocks have been replaced by fresh inventory within a specific time frame. This ratio analyses and accurately calculates the effective management of your inventory. This ratio is also referred to as a stock turnover ratio. Perhaps the most important among them is the inventory turnover ratio, which is unique in evaluating your business operations. There are multiple finance ratios that are resorted to for assessing various business activities.
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