How to use the inventory turnover and COGS calculator
The page has two tools that work together.
Cost of goods sold applies the periodic inventory method: what you started with, plus what you bought, minus what is left.
- Beginning inventory is the value of stock at cost on the first day of the period. It equals last period’s ending inventory.
- Purchases are the cost of goods bought during the period, after returns and supplier discounts.
- Freight-in is shipping you paid to receive goods. Shipping to customers is a selling expense, not part of COGS.
- Direct labor and overhead apply to manufacturers. A retailer or wholesaler can leave this at 0.
- Ending inventory comes from a physical count or your inventory system, valued at cost.
- Revenue is optional and adds gross profit, gross margin and markup.
Turnover takes a year of COGS, beginning and ending inventory and a carrying cost rate. It returns inventory turnover, days inventory outstanding, weeks of supply and the annual cost of holding the stock, plus a table showing how those figures change at other inventory levels.
The formulas
Gross margin = (Revenue − COGS) ÷ RevenueThe first four terms together are the cost of goods available for sale. Everything available was either sold (COGS) or is still in stock (ending inventory).
Inventory turnover = COGS ÷ Average inventory
Days inventory outstanding = 365 ÷ Inventory turnover
Annual holding cost = Average inventory × Carrying cost rateCOGS must cover a full year for the turnover to be an annual figure. The carrying cost rate is the yearly cost of holding $1 of inventory, as a percentage.
A worked example
COGS. A small retailer, Company A, started the year with $85,000 of stock, bought $410,000 more and paid $12,000 in freight-in. That makes $507,000 of goods available for sale. The year-end count found $92,000 still on hand, so cost of goods sold is $415,000. Against revenue of $720,000, gross profit is $305,000 and the gross margin is 42.36%.
Turnover. Average inventory over the year was $88,500. Dividing COGS by it gives turnover of 4.69×: the shelves emptied and refilled that many times. Stock sat for 77.8 days on average. With a 25% carrying cost, holding that inventory costs about $22,125 a year.
How inventory changes move COGS
COGS is not the same as purchases. When a business buys more than it sells, the extra goes into inventory and COGS comes in below purchases. In the example, inventory built up by $7,000 over the year.
The opposite happens when stock is run down. If Company A had ended the year with $70,000 of inventory instead, COGS would be $437,000 and gross margin would fall to 39.31%, even though nothing about its pricing or purchasing changed. That is why an error in the ending inventory count flows straight into profit: every dollar overstated in ending inventory understates COGS and overstates gross profit by the same dollar.
For a manufacturer, production wages and factory overhead are part of the cost of the product. In the manufacturer scenario, with $150,000 of direct labor and overhead on top of $300,000 of materials, COGS is $530,000 and gross margin is 41.11%.
Reading turnover and days of inventory
Higher turnover means stock moves quickly, so less cash is tied up in it and less of it risks becoming obsolete or damaged. Lower turnover means slower-moving stock, which can be deliberate (a wide range or safety stock for reliable delivery) or a sign of over-buying and items that no longer sell.
Neither extreme is automatically good. Very high turnover can mean the shelves are too thin, so customers find items out of stock and sales are lost. The useful questions are whether turnover is moving in the right direction over time, and whether it is in line with businesses that sell similar goods.
The table under the Turnover tab holds COGS fixed and changes only the inventory level. In the example, carrying 10% less stock would free about $8,850 of cash, cut days of inventory to 70.1 days and save roughly $2,213 a year in holding costs.
What the holding cost covers
The carrying cost rate collects every cost of owning inventory: warehouse space, insurance, handling, shrinkage and theft, items that spoil or go out of date, and the return the money could earn elsewhere. Rates of 20% to 30% a year are often quoted, but the right figure depends heavily on the product and on your cost of capital, so test a range:
| Carrying cost rate | Annual holding cost on $88,500 |
|---|---|
| 15% | $13,275 |
| 25% (example) | $22,125 |
| 35% | $30,975 |
Even at the low end, slow stock has a real price that does not show up as a single line in the accounts.
Common mistakes
- Mixing cost and selling price. Inventory, purchases and COGS should all be at cost. Valuing ending inventory at retail price inflates it and understates COGS.
- Using revenue instead of COGS. Revenue ÷ inventory overstates turnover by the markup.
- Mismatched periods. A quarter’s COGS divided by average inventory gives quarterly turnover; multiply by 4, or use a full year, before comparing with annual figures.
- Year-end snapshots. Many businesses run inventory down before year end. If stock peaks mid-year, an average of monthly balances gives a more honest picture than two year-end figures.
What this calculator does not include
The COGS tool uses the periodic method and takes your inventory values as given. It does not choose between valuation methods such as FIFO, LIFO or weighted average cost, which can produce different COGS from the same purchases when prices are changing. It does not separate inventory write-downs, which some businesses report outside COGS, and it treats freight-in, labor and overhead as fully inventoriable. Tax rules for which costs must be capitalized into inventory vary; in the US, larger businesses fall under the uniform capitalization rules. The turnover figures assume a 365-day year of COGS and a single inventory balance; businesses with many product lines learn more from turnover by category. To see how inventory days combine with customer and supplier terms, use the cash conversion cycle calculator.