How to calculate inventory cost

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 an inventory cost calculator and step-by-step guide to help you to determine your inventory costs.

QuickBooks inventory cost calculator

Here’s our straightforward inventory cost calculator:

What is inventory cost?

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:

• Purchase Costs: Expenses incurred when acquiring inventory from suppliers or manufacturers. This includes the actual cost of purchasing the goods. 

• Holding Costs: Expenses associated with storing and maintaining inventory over time. These include warehousing or storage costs, insurance premiums, property taxes, utilities, and security. Check out our holding costs calculator.

• Ordering Costs: Expenses incurred each time inventory is ordered or restocked. Costs include activities such as placing orders, communicating with suppliers, and processing paperwork. 

• Shortage Costs: Expenses incurred when demand for inventory exceeds the available supply. These costs can include lost sales opportunities, customer dissatisfaction, rush orders or expedited shipping fees to replenish inventory.

Inventory cost calculation formula

There are multiple inventory cost formulas involved with determining your inventory costs, depending on the costing method you use. These include: 

First-In, First-Out (FIFO) Method:

• Inventory Cost = (Quantity of Goods Sold x Cost of Oldest Purchased Inventory) + (Quantity of Ending Inventory x Cost of Most Recent Purchased Inventory)

Last-In, First-Out (LIFO) Method:

• Inventory Cost = (Quantity of Goods Sold x Cost of Most Recent Purchased Inventory) + (Quantity of Ending Inventory x Cost of Oldest Purchased Inventory)

Average Cost Method:

• Inventory Cost = (Quantity of Goods Sold x Weighted Average Cost per Unit) + (Quantity of Ending Inventory x Weighted Average Cost per Unit)

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)

How to calculate inventory cost manually 

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:

• There are different methods for valuing inventory, such as first-in, first-out (FIFO), last-in, first-out (LIFO), and average cost. Ensure that you are aware of the costing method used by your business.

• Add up the total cost of the goods purchased during the accounting period. This includes the purchase price of the items, any shipping costs, import duties, and other directly attributable expenses. This calculation provides the total cost of the inventory available for sale.

• If you have inventory from the previous accounting period, determine its value and add it to the cost of goods purchased. You typically base the beginning inventory on the closing inventory value from the previous period.

• Determine the inventory value that remains unsold at the end of the accounting period. This is known as the ending inventory. You can determine the value of the ending inventory using the same costing method as used for the cost of goods purchased.

• Subtract the value of the ending inventory (Step 4) from the total cost of goods available for sale (Step 2 plus Step 3). This will give you the cost of goods sold (COGS) during the accounting period.

• Finally, subtract the COGS (Step 5) from the total cost of goods available for sale (Step 2 plus Step 3). The resulting value represents the remaining cost of inventory that has not been sold.

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.

How QuickBooks can help

Calculating inventory costs is essential for businesses that hold physical stock. If you hold stock, calculating your inventory costs allows you to practise careful financial management and make decisions about purchasing, production, and sales. 

QuickBooks can help with financial planning and accounting to help feel confident in your financial decisions. Sign up for QuickBooks today. 

Frequently asked questions

How do you calculate the total cost of inventory?

Want to know how to calculate the total cost of inventory? It’s simple with our automatic inventory cost calculator. You need to consider several components, including your cost of beginning inventory, cost of purchases, and cost of ending inventory. Use the formula below:

Total Cost of Inventory = Cost of Beginning Inventory + Cost of Purchases - Cost of Ending Inventory

How do you calculate inventory cost per unit?

To calculate the inventory cost per unit, you need to divide the total cost of inventory by the total number of units in inventory. The formula for calculating inventory cost per unit is:

Inventory Cost per Unit = Total Cost of Inventory / Total Number of Units in Inventory

What are the four inventory costs?

The four main types of inventory costs are purchase costs, holding costs, ordering costs and shortage costs.

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