This guide is for users who want to understand how cost of goods sold, or COGS, is calculated and which inventory costing method Amir uses.
Inventory cost is the total cost paid to make goods ready for sale. It usually includes:
Administrative costs, sales costs, warehousing after goods are ready for sale, advertising, and general company overhead are not part of inventory cost. They are usually recorded as period expenses.
Amir manages inventory with a perpetual inventory approach. In a perpetual system, every purchase and sale immediately affects inventory quantity and inventory value.
When goods are sold, two main accounting entries are involved:
Accounts receivable / Cash and bank ........ Debit
Sales revenue .......................... Credit
Cost of goods sold ......................... Debit
Inventory .............................. Credit
The first entry records sales revenue. The second moves the value of goods leaving inventory into cost of goods sold.
When an item is purchased several times at different prices, the software must decide which cost rate to use when the item is sold. Common methods are:
| Method | Simple meaning |
|---|---|
| FIFO | Assumes older units are sold first; sales cost comes from older purchases. |
| LIFO | Assumes newer units are sold first; sales cost comes from newer purchases. |
| Periodic weighted average | Calculates one average for the period at period end. |
| Moving weighted average | Updates the average unit cost after every purchase. |
Amir currently uses only the moving weighted average method. FIFO, LIFO, and periodic average are not implemented in Amir right now.
With this method, each new purchase changes the average unit cost. When a sale is recorded, COGS is calculated from the average cost at that moment.
Simple formula:
New average =
((Previous quantity × Previous average) + (New purchase quantity × New purchase unit cost))
÷
(Previous quantity + New purchase quantity)
If a direct ancillary purchase cost is recorded, that cost increases inventory value and raises the average unit cost.
Suppose item A is purchased like this:
New average:
(100,000,000 + 240,000,000) ÷ 300 = 1,133,333 IRR
If 30,000,000 IRR of direct freight cost is later recorded for this stock:
(340,000,000 + 30,000,000) ÷ 300 = 1,233,333 IRR
If 50 units are sold:
COGS = 50 × 1,233,333 = 61,666,650 IRR
After the sale: