What is the proper way to calculate COGS for a retail organic grocer?
I am working as a consultant for a retail organic grocery that is confusing me regarding their calculations for COGS. One of the owners, an 83-year old that has an extensive grocery background is trying to convince me that your COGS is calculated by using a retail margin % of your sales per category.
For example, if your goal is a 40% margin on grocery category items, then the COGS is 60% of the sales of that category. Additionally, they are communicating to me that your monthly purchases of all products will be your COGS.
All of this, even with my background is perplexing me. Is this an accurate way of calculating your COGS for the grocery business?
Your feedback would be most appreciated.
COGS - is an acronym for "COST OF GOODS SOLD" in accounting equation, COGS, is;
Opening inventory (for example) -$20,000
less Closing inventory $10,000
In light of your question written above, retail margin % is entirely different from COGS. Retail margin as a percentage is the proportion of profit in the sales which is now expressed as a percentage. For example. lf $10 is the profit on an item, and the selling price is $50, the retail margin as expressed in percentage will be 20%. This is $10/$50.
Whereas, COGS, is the value of number of goods available for sale. From the calculation l gave as an example above, the opening inventory which is the value of goods in the store before the grocery store commence the transaction. The opening inventory will be then be added to the actual purchases made during the transaction period under review. At the end of the review period, what is left in the grocery unsold is called closing inventory. This closing inventory will be deducted from the addition of both the opening inventory and the purchases figure given above. The net difference is called COGS. On your final question on whether your purchases could be taken as your COGS. Perhaps, your purchases could be taken as your COGS. This is possible where there are no both opening and closing inventories. This occurrence exists for the newest startup. Where there are no opening inventory, and all the purchases made in the review period are also sold. This way, your purchases are taken purely as your COGS. Hope l have been able to help your understanding in this regard? For more insight into this area, mail me on email@example.com. l shall oblige to elucidate further. Thank you.