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How to Calculate Cost of Goods Sold Ratio

Relationship between cost of goods sold and sales is called cost of goods sold ratio. It is also called cost of sales to revenue ratio. It is the part of ratio analysis for checking the efficiency of business. You know that cost of goods sold is the main part of total business expenses.
 If you have to sell, it means, you have to buy or use stock in your store which you have bought in past. You have to pay the labor cost for producing this and you will also pay other direct expenses. As a businessman, you will always be interested to see what amount out of sale will go directly for buying sold goods. If we study cost of goods sold ratio with gross margin ratio, we can explain our business performance. So, when we are calculating gross margin ratio, we should also calculate cost of goods sold ratio.

Now, we are explaining its two steps:

Ist Step : To Collect Required Information 

For calculating cost of goods sold ratio, you need to calculate cost of goods sold and sales. If you are doing service business, at that time, you should collect the information of your total business revenue and total business expenses. I already explain, how to calculate cost of goods sold and Sales (actual and budgeted).

2nd Step : To Apply Formula

Now, we just put the value of cost of goods sold and sales in following formula.

Cost of goods sold / sales

If we want to know its %, we can multiply this formula with 100.

Important Note : Both gross margin and markup can be calculated from cost of goods sold ratio. Gross profit or gross margin ratio is the relationship of gross profit and sales. Deduct cost of goods sold ratio out of 100 will be the figure of gross margin and gross markup is the ratio which is calculated by dividing gross profit with cost of goods sold ratio.

See more in following example :


Related : Learn Accounting Step by Step 

COMMENTS

: 4
  1. Very helpful. Thanks a lot, I used this ratio for auditing trade receivables.

    ReplyDelete
  2. How does sales discount like those offered in flash sales affect this ratio?

    ReplyDelete
  3. Thanks, that was really helpful! I've been trying to figure out how to do do industry average ratio analysis, do you have any tips or useful links? Thanks in advance for your reply!

    ReplyDelete
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Accounting Education: How to Calculate Cost of Goods Sold Ratio
How to Calculate Cost of Goods Sold Ratio
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Accounting Education
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