# Cost of Goods Sold Overview: Study Sheet

• Cost of Goods Sold is a measure of the direct cost involved in acquiring or producing goods that are, in turn, sold. The methods of measuring cost of goods sold are explained below, but a company's chosen method must be consistent with their method of measuring inventory value.
• Inventory represents finished and unfinished goods which have not yet been sold by a company.
• Inventory Valuation is a measure of the value of a comapny's unsold inventory. The methods of measuring inventory value are explained below, but a company's chosen method must be consistent with their method of measuring cost of goods sold.

## Cost of Goods Sold

The value of inventory (goods) a company has sold can be calculated using one of the following methods:

## Average Cost Method

• Assumes goods sold are non-unique (that is, every one is similar to every other one)
• Not generally recommended where prices are volatile
• Tends to even out price fluctuations over time
• Like with Inventory Valuation, uses the average unit cost to calculate the cost of goods sold:
• Average Unit Cost = (Total Unit Cost)/(Total Quantity of Units)

Cost of Goods Sold = (Average Unit Cost) x (Number of Units Sold)

## FIFO (First In, First Out) Method

• Assumes goods sold are non-unique (that is, every one is similar to every other one)
• Generally preferred cost of goods sold valuation method
• Assumes inventory is sold in the order that it is stocked, with the oldest goods sold first and the newest goods sold last
• Uses the unit cost per batch of acquired/produced goods, and counts the cost of goods forwards from the oldest batch:
• Unit Cost per batch = (Cost/Quantity) for each batch

Cost of Goods Sold = (Unit Cost x Quantity) for each batch

## LIFO (Last In, First Out) Method

• Assumes goods sold are non-unique (that is, every one is similar to every other one)
• Is highly regulated (or, in some cases, illegal) as a method for measuring cost of goods sold
• Assumes newest inventory is sold first, with the oldest goods sold last
• Uses the unit cost per batch of acquired/produced goods, and counts the cost of goods sold backwards from the newest batch:
• Unit Cost per batch = (Cost/Quantity) for each batch

Cost of Goods Sold = (Unit Cost x Quantity) for each batch