When it comes to calculating your ending inventory, there are a few things you need to keep in mind. First, you need to determine the cost of goods sold (COGS). This can be done by taking your beginning inventory and adding in any purchases made during the period. From there, you will subtract your ending inventory. This will give you your COGS.
Once you have your COGS, you can then calculate your ending inventory. To do this, you will take your beginning inventory and subtract your COGS. This will give you your ending inventory.
Keep in mind that these calculations are important for businesses in order to properly manage their inventory and ensure that they are not over or under stocking their products.
- Beginning inventory + COGS = total cost of goods available for sale.
- Gross profit x sales = estimated cost of goods sold.
- Total cost of goods available for sale – cost of goods sold = ending inventory.
Methods for calculating ending inventory
To determine ending inventory, you can use a variety of valuation techniques. Businesses typically stick with the same valuation method for each accounting period because switching methods is challenging and can skew data. Regardless of the valuation method you select, the number of inventory units remains constant, but the ending inventory value may change. Because of this, businesses choose their valuation techniques carefully.
A company may decide to use valuation techniques like these if it has the ability to perform a physical count of its inventory at the conclusion of each accounting period:
When performing a physical inventory count at the end of each accounting period is not ideal for a business, it may opt for a valuation method that relies on estimation, such as:
What is ending inventory?
The value of items that are still on the market at the end of an accounting period is known as ending inventory. If your company sells goods, you most likely will still have some at the end of each accounting period. You call these items and their value “ending inventory. “.
You must first subtract the cost of the good sold from the beginning inventory before adding the cost of net purchases to determine ending inventory. “Net purchases” refers to deducting returns and discounts from inventory purchase amounts. Based on the market value or the cost of goods, this ending inventory formula will provide you with the final value of the inventory for an accounting period.
The formula is:
How to calculate ending inventory using the retail method
To calculate ending inventory using the retail method, you:
1. Find the cost-to-retail percentage
Divide the retail price of the inventory by the actual cost of the inventory to obtain this percentage.
Cost-to-retail percentage formula:
Inventory cost divided by retail price of inventory equals the cost-to-retail percentage.
2. Find the cost of goods available
Afterward, combine the price of all of your purchases with the cost of your initial inventory. The result is the cost of goods available for sale.
Cost of goods available formula:
Cost of available goods = Cost of initial inventory + Cost of total purchases
3. Find the cost of sales
To calculate the cost of sales, multiply the total amount of sales by the cost-to-retail percentage.
Cost of sales formula:
Cost of sales = Sales x Cost-to-retail percentage
4. Find the ending inventory
You can do this by dividing the cost of available goods by the cost of goods sold. The result will be your ending inventory.
Ending inventory retail formula:
Cost of goods available minus the cost of goods sold during the period equals ending inventory using retail.
How to calculate ending inventory using the gross profit method
The steps for calculating ending inventory using the gross profit method are as follows:
1. Find the cost of goods available
You can do this by combining the cost of all of your purchases with the cost of your initial inventory. The result is the cost of goods available for sale.
The cost of goods available formula is:
Cost of available goods equals the cost of the initial inventory plus the total cost of all purchases
2. Find the cost of goods sold
The cost of goods sold is then calculated by multiplying the total amount of sales by the gross profit percentage.
Cost of goods sold formula:
Cost of good sold = Sales ∗ Gross profit percentage
3. Find the ending inventory
Subtracting the cost of goods sold from the cost of goods available is the final step in the gross profit method. The result will be your ending inventory.
Ending inventory gross profit formula:
using the formula cost of goods available minus cost of goods to end inventory
How to calculate ending inventory using the work in the process method
The work-in-progress method is a different approach that can be used to determine ending inventory:
1. Find the beginning work in progress (WIP) inventory
To find the starting WIP inventory, first subtract the materials transferred to production from the materials purchased.
Beginning WIP inventory formula:
Beginning WIP inventory is equal to materials that have been bought and then moved into production.
2. Find the manufacturing costs
The next step is to include the production materials transferred, direct labor, and manufacturing overhead. This will allow you to identify the manufacturing overhead cost.
Manufacturing cost formula:
Direct labor and manufacturing overhead are the two components of manufacturing cost.
3. Find the cost of goods manufactured
Add the manufacturing costs, direct materials used, direct labor used, beginning WIP, and finally subtraction of ending WIP. The result is the cost of goods manufactured.
Cost of goods manufactured formula:
Cost of producing goods equals (Direct materials used Direct labor used Manufacturing costs Beginning WIP) – Ending WIP.
4. Find the ending inventory
Add the initial WIP and the manufacturing costs, then deduct the price of the produced goods. The result will be your ending inventory.
Ending inventory WIP formula:
Using work in process, reduce inventory by (starting WIP manufacturing costs) Cost of goods produced.
Examples of how to calculate ending inventory
Here are examples of how to calculate ending inventory using the gross profit, retail, and work-in-process methods using the steps above:
Gross profit example
Cost of available goods equals the cost of the initial inventory plus the total cost of all purchases
$10,000 + $5,000 = $15,000
Cost of goods available = $15,000
2. Find the cost of goods sold
Cost of good sold = Sales ∗ Gross profit percentage
$8,000 ∗ 75% = $6,000
Cost of goods sold = $6,000
3. Find the ending inventory
using the formula cost of goods available minus cost of goods to end inventory
$15,000 – $6,000 = $9,000
Ending inventory using gross profit = $9,000
Retail example
Inventory cost divided by retail price of inventory equals the cost-to-retail percentage.
300 ÷ 500 = 0.6 or 60%
Cost-to-retail percentage = 60%
Cost of available goods = Cost of initial inventory + Cost of total purchases
$1,000,000 + $500,000 = $1,500,000
Cost of goods available = $1,500,000
Cost of sales = Sales ∗ Cost-to-retail percentage
$1,800,000 ∗ 60% = $1,080,000
Cost of sales = $1,080,000
Using retail, ending inventory equals cost of goods available minus cost of sales for the time period.
$1,500,000 – $1,080,00 = $420,000
Ending inventory using retail = $420,000
Work in process example
Beginning WIP inventory is equal to materials that have been bought and then moved into production.
$100,000 – $92,000 = $8,000
Beginning WIP inventory = $8,000
Direct labor and manufacturing overhead are the two components of manufacturing cost.
$92,000 + $60,000 + $88,000 =$240,000
Manufacturing costs = $240,000
Cost of producing goods equals (Direct materials used Direct labor used Manufacturing costs Beginning WIP) – Ending WIP.
($92,000 $60,000 $240,000 $8,000) – $162,000 = ($400,000) – $162,000 = $238,000
Cost of good manufactured = $238,000
Using work in process, reduce inventory by (starting WIP manufacturing costs) Cost of goods produced.
($8,000 + $240,000) – $238,000 = $10,000
Ending inventory using work in process = $10,000
Calculate Ending Inventory Using the FIFO Method
FAQ
How do you calculate ending inventory cost?
First, determine the total number of inventory items that remain unsold. Second, multiply that number by the average cost per item. The result is the total average cost of ending inventory .
How do you calculate beginning inventory and ending inventory?
- Inventory purchased over the course of the period minus (Cost of Goods Sold Ending Inventory) equals Beginning Inventory.
- Cost of Goods Sold = Amount of Goods Sold x Unit Price
- Ending Inventory = Amount of Goods in Stock x Unit Price
How do you find ending inventory using FIFO?
The FIFO method uses the most recent units and assumes that the first units are sold first. Given that the price of the most recent units purchased was $10, the ending inventory would be 1,500 x 10 = 15,000
