Cost of goods sold (COGS) refers to the cost of purchasing the product that you sold and is calculated by multiplying the unit cost by the quantity sold of a product. When a boutique sells 10 units of a product for $100 each and the unit cost of the goods sold is $20, the COGS for this sale will be $200 ($20 x 10) and the profit from the sale will be $800 ($1000 - $200).
In Shoptiqes POS, we offer our boutiques the COGS metric and other metrics to gain insights on the profitability of each sale and item. This article will talk about how the Cost of goods sold is calculated in Shoptiques POS.
Please keep in mind that only a Purchase Order or an Inventory Check Order that increases the quantity of a product would update the unit cost of a product. The different scenario below would help you better understand how unit cost and COGS are calculated:
1. A Purchase Order
Assumes that the original quantity of Product A is 0 quantity. The purchase order of 10 units of Product A at a unit cost of $20. A sale of 5 units of Product A is made subsequently, and the COGS will be $100 ($20 x 5).
#Product A Before the Purchase Order
Quantity: 0
Unit Cost: $0
#Purchase Order
Quantity purchased: 10
Unit Cost: $20
#Product A After the Purchase Order
Quantity: 10
Unit Cost: $20
COGS for selling 10 units: $100
2. Another Purchase Order
Another purchase order of 10 units with a unit cost of $25 is placed. The unit cost for Product A will be updated to $23.33 (($20 x 5 + $25 x 10) / (10 + 5)). Shoptiques POS adopts the weighted average method for calculating the unit cost by incorporating the old unit cost and quantity before the new purchase order to the formula. When a sale of 5 units of Product A is made, the COGS will then be $116.67 ($23.33 x 5).
#Product A Before the Purchase Order
Quantity: 5
Unit Cost: $20
#Purchase Order
Quantity purchased: 10
Unit Cost: $25
#Product A After the Purchase Order
Quantity: 15
Unit Cost: $23.33
COGS for selling 5 units: $116.67
3. An Inventory Check Order
An inventory check that increases the quantity of product A from 10 to 20 is placed with a unit cost of $30. The unit cost for Product A will be updated to $26.67 (($23.33 x 10 + $30 x 10) / 20). If a sale of 5 units is made, the COGS will be $133.35 ($26.67 x 5).
#Product A Before the Inventory Check Order
Quantity: 10
Unit Cost: $23.33
#Purchase Order
Quantity Increased: 10
Unit Cost: $30
#Product A After the Inventory Check Order
Quantity: 20
Unit Cost: $26.67
COGS for selling 5 units: $133.35
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