Accurate inventory cost calculation is crucial for preparing financial statements, like your balance sheet and income statement. Since inventory represents a significant asset for many businesses, its valuation directly affects financial ratios, profitability analysis, and the overall financial health of your company.
We’ve provided a calculator and step-by-step guide to determine your inventory costs.
Inventory costs are the expenses incurred when acquiring, storing, and maintaining a company's inventory. It encompasses various elements that contribute to the overall cost of managing inventory within a business.
An accurate understanding of inventory costs is crucial for effective financial management and decision-making. Without regularly maintaining these costs, it can negatively impact your company’s profitability and cash flow.
Inventory costs are typically split into 4 sections:
Here’s our straightforward inventory cost calculator:
There are multiple formulas involved with determining your inventory costs, depending on the costing method you use. These include:
First-In, First-Out (FIFO) Method:
Last-In, First-Out (LIFO) Method:
Average Cost Method:
To calculate the weighted average cost per unit for the average cost method, you can use the following formula:
Weighted Average Cost per Unit = (Total Cost of Goods Available for Sale) / (Total Quantity of Goods Available for Sale)
To calculate inventory cost manually, you need to consider the cost of the goods purchased, any additional costs from acquiring and storing the inventory, and any adjustments for changes in inventory value. Here's a step-by-step guide on calculating inventory cost manually:
If you use the FIFO or LIFO method, you must allocate the costs based on the order in which the goods were purchased or sold. Additionally, adjustments may be necessary for inventory write-downs, obsolescence, or any other changes in the value of the inventory.
Calculating inventory costs is essential for businesses that hold physical stock. If you hold stock, calculating your inventory costs allows you to practice careful financial management and make decisions about purchasing, production, and sales.
QuickBooks inventory management software allows businesses to set up and manage their inventory by tracking the quantities and values of their products. You can record purchase orders, sales orders, and invoices, enabling your business to track the flow of inventory and its associated costs.
QuickBooks also automatically calculates the COGS based on the inventory values and quantities. By accurately calculating COGS, businesses can determine their profitability and make informed pricing decisions.
If you use different inventory valuation methods like FIFO and LIFO, QuickBooks can support you. Our software determines the cost of inventory sold based on the order in which items were purchased or added to the inventory. QuickBooks then automatically applies the chosen valuation method to calculate the cost of inventory and COGS.
Ready to automate your inventory cost calculations? Sign up for QuickBooks Online today.
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