Step 2: Identify your cost of goods sold
If you are selling a product, you will need to identify your cost of goods sold (COGS), which are the expenses directly related to your sales, such as stock purchases, delivery costs for your stock and any import or, customs duty.
You may check your COGS based on a particular point in time, or at the end of the year when preparing annual accounts.
The formula for calculating the cost of goods sold for the year, incorporating any stock on hand is:
If you do not have any stock remaining then the cost of goods sold will be the total cost of your stock purchases including freight costs, import and customs duty for the year.
Now that Paul has identified that he will sell 1,500 units at $60.00 per unit and will receive revenue of $90,000 for the year, he now needs to determine the cost of goods sold.
When Paul was pricing his product he calculated that his per unit cost for stock would be $30.00, which included freight costs and import duties. He now needs to report this cost for the 1,500 units he will sell over the year.
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