When will the COGS be Calculated Incorrectly?

The Unit Cost of a product will be recalculated and updated whenever the inventory of that product increases through a Purchase Order or an Inventory Check Order. COGS will be calculated when a sale is made by multiplying the units sold by the current Unit Cost. For instance, if the current unit cost of Product A is $10 and 8 units are sold in one sale, the COGS of that sale would be $80 ($10 x 8). 

There are situations where the Unit Cost of a product can be miscalculated and, in turn, its COGS will be incorrect. This article will talk about what are those situations where miscalculation could happen.

#1 Put in a Wrong Number in a Purchase Order or Inventory Check Order

This error is very straightforward. As mentioned in the opening paragraph, the Unit Cost will be updated when a new purchase order or a new inventory check order is created. When creating a new order, please make sure the Unit Cost is correctly typed.

# Sell Out-of-Stock Inventory

An example would better illustrate how the miscalculation would happen when selling out-of-stock inventory. Product A has a Unit Cost of $10 and a quantity of 1. 30 units of Product A are later sold, the COGS of the sale will be $300 ($10 x 30) and the inventory of the product will be a negative number of -29.

Remember that the Unit Cost will only be updated when there is a new Purchase Order or an Inventory Check Order that increases the inventory. When a new Purchase Order is made and 2 units of inventory with a unit cost of $8 are included in the order, the new Unit Cost will be recalculated with the following formula:

New Unit Cost = Old Unit Cost x Existing Product Quantity + Order's Unit Cost x Order's Quantity / Updated Total Quantity

 = (-29 x $10 + 2 x $8) / (-29 + 2)

 = -290 + 16 / -27

 = 10.15

As the new Unit Cost in the Purchase Order is lower than the previous Unit Cost by $2 ($10 - $8), we would expect the updated Unit Cost should be lower, but due to the negative inventory, the updated Unit Cost is actually higher than before.

Therefore, we DO NOT recommend selling out-of-stock inventory in order to avoid miscalculations in the COGS and in turn, the Gross Margin. 

To stay away from selling out-of-stock inventory, you can enable the warning message that shows when selling out of stock inventory in the Shoptiques POS iPad App. To prevent cashiers from selling out-of-stock items, see this article.