How Do You Calculate the Cost of Goods Purchased?
The cost of goods purchased is calculated by subtracting the cost of goods sold from the cost of sales. Figuring out the cost of goods purchased is valuable for many businesses because it reflects whether or not a business has spent too much money on inventory. In addition, the cost of goods purchased is a useful tool for determining how much product needs to be sold to make a profit.
The first step to determining the cost of goods purchased is to locate the cost of sales on the balance sheet or income statement. The cost of sales includes the price of products, the cost of labor to produce products, materials, delivery costs and any other expense related to selling a product. Next, subtract the amount of products purchased by cash or credit. This figure is the total cost of goods purchased.
If the amount is positive, the business is selling products at an appropriate price, and the business has made money. If the number is negative, the price of the product exceeds the cost to manufacture it, and the business is losing money. To get an accurate number, always use figures from a complete fiscal year. Using data from only part of the year is not accurate because sales trends and prices fluctuate throughout the year.