Whether you’re a manufacturer or a retailer, getting your goods ready for sale usually involves some expenses. The totality of these costs is what is termed Cost of Goods Available for Sale.
It is a good practice to keep track of every cost incurred in acquiring and processing a product. You will find those records helpful when calculating the actual value of your inventory.
If you don’t pay attention to details in expenditure, you might get to underprice your goods and incur business losses.
What is the Cost of Goods Available for Sale?
The Cost of Goods available for sale over a given period is the total cost of the inventory ready to be sold at the time.
Here, we are considering only the stock available for sale and not the ones that have been sold already. So, it is different from the Cost of Goods Sold (COGS).
If you’re a manufacturer, the cost of goods available includes all the money spent from production to final packaging. For a retailer, it involves the cost of acquiring the product and other expenses needed to get it consumer-ready.
Calculating Cost of Goods Available For Sale
First, you need to know the total value of your inventory ready for sale at the beginning of the accounting period.
Then, add it to the total cost of the inventory acquired within that period. This includes both the cost of production and/or purchases plus other direct expenses such as transport.
We are not taking into account any expenses involved in selling the goods and the inventory at the end of the period.
For instance, you have a total of $5000 as the starting inventory for the year. Within the year, you purchased goods at a total cost of $20000 and spent $3000 on the packaging.
The Cost of Goods Available for sale would then be:
$5000 + $20000 + $3000 = $28,000
Cost of Goods Available vs Cost of Goods Sold
While Cost of Goods Available applies only to the inventory ready for purchase, Cost of Goods Sold accounts for the expenses for goods already sold.
To get the COGS, calculate the ending inventory and other sales-related direct expenses and subtract them from the Cost of Goods available.
Why is Cost of Goods Available For Sale Useful?
Your financial statement and your tax return both require the record of your Cost of Goods Sold. In turn, you need the Cost of Goods available for sale to calculate the COGS.
If you get the calculations wrong, it either overestimates or underestimates your taxable income. If you overpay tax, you reduce your business profit, and if you underpay, you might attract sanctions from the IRS.
Also, knowing what exactly it costs to make your goods ready for sale helps you decide the perfect product pricing.
Whatever affects your pricing or tax affects your profit and whatever affects your profit deserves full attention. And of course, the Cost of Goods available for sale is one of those indices.
So, you need to be sure to get this important figure very correctly to better inform your business decisions.