For any inventory account, there will be a beginning balance, an amount coming in, an amount leaving the account to go somewhere else, and an ending balance. Here's the relationship:
BEGINNING BALANCE + WHAT CAME IN - WHAT WAS TRANSFERRED OUT = ENDING BALANCE
For a merchandising company, the formula would look like this:
BEGINNING BALANCE + COST OF GOODS PURCHASED - ENDING INVENTORY = COGS
If Johnson Company had beginning inventory of $20,000 and purchased an additional $80,000 of inventory during the year, what was the cost of goods available for sale? If the ending inventory for the year was $14,000, what was the Cost of Goods Sold for the year?
OLSON MANUFACTURING COMPANY HAS THREE INVENTORIES
Olson started on January 1 with raw materials of $16,700. They purchased an additional $152,500 of raw materials. On December 31, they had a balance of $22,800 of raw materials. Can you determine the amount of raw materials they used?
Olson started on January 1 with WIP of $18,400. The direct materials cost for the year was $146,400; Direct Labor was $175,600; and Manufacturing Overhead was $54,800. The ending balance of WIP for the year on December 31 was $25,200. Can you compute the amount that was transferred out of Work in Process?
For a manufacturer:
BEGINNING BALANCE + COST OF GOODS MANUFACTURED - ENDING INVENTORY = COGS
Olson started the year on January 1 with Finished Goods of $40,000. Cost of Goods Manufactured for the year was $370,000. The ending balance of Finished Goods on 12/31 was $50,000. Can you compute the Cost of Goods Sold?