Tony, Jersey Shore, uses this method. During the summer season, he records the following transactions:
At the beginning of the season, Tony buys 240 tank tops at $5 per unit from a manufacturer for a total of $1,200.
During the month of June, Tony sells 100 tank tops and purchases a restock of 120 for $840. In July, Tony sells 200 tank tops and purchases a restock of 360 more for $1800.
The actual total cost of Tony’s inventory during the summer is $3840 ($1,200 + $840 + $1,800). His total purchased inventory for the season is 720 (240 beginning inventory + 480 purchased). Tony’s weighted average cost per unit is $5.33 ($3,840 / 720 units). This can be used to plan likely COGS for next summer.
How to choose the COGS calculation method that’s right america phone number list for your business
There are really two key considerations to determining the right COGS calculation method: Are you purchasing large volumes of similar products, or are each of your products unique? It’s also important to think about whether or not you’re creating your own products or purchasing from vendors.
For example, if you’re a big-box retailer, you’ll likely be purchasing multiple similar products, so would likely use a weighted average cost method. Manufacturing may use a similar method but break down the COGS calculation to include raw production materials. Contrarily, for independent retailers like antique shops, the specific identification method makes more sense; you’re building an inventory of unique items.