Cost of goods available for sale definition
/What is the Cost of Goods Available for Sale?
The cost of goods available for sale is the total recorded cost of beginning finished goods or merchandise inventory in an accounting period, plus the cost of any finished goods produced or merchandise added during the period. This information is used to derive the cost of goods sold for any reporting period. As such, it is an important calculation for any manufacturing, retailing, or distribution business that sell goods to its customers (as opposed to services).
Related AccountingTools Courses
Accounting for Merchandising Operations
How to Calculate the Cost of Goods Available for Sale
The calculation of the cost of goods available for sale is to add together the total of beginning sellable inventory, finished goods produced, and merchandise acquired. The formula is as follows:
Beginning sellable inventory + Finished goods produced + Merchandise acquired = Cost of goods available for sale
The cost of any freight needed to acquire merchandise (known as freight in) is typically considered a part of this cost.
Under the periodic inventory system, the ending inventory balance is then subtracted from the cost of goods available for sale to arrive at the cost of goods sold (which appears in the income statement).
Example of the Cost of Goods Available for Sale
ABC International has $1,000,000 of sellable inventory on hand at the beginning of January. During the month, it acquires $750,000 of merchandise and pays $15,000 in freight costs to ship the merchandise from suppliers to its warehouse. Thus, the total cost of goods available for sale at the end of January (prior to any calculation of the cost of goods sold) is $1,765,000.
Understanding the Cost of Goods Available for Sale
The cost of goods available for sale tends to be somewhat overstated, since it may include obsolete or damaged goods that are not really "available for sale." In a well-run accounting department, a reserve for obsolete inventory will be used that reduces the cost of goods available for sale by an estimate of goods that may not be sellable. This estimate is usually based on an analysis of the proportion of obsolete and damaged goods found in the inventory. Smaller organizations may not have sufficient staff to conduct this analysis, and so do not have a reserve for obsolete inventory.