To perpetuate business, sold goods need to be replenished. CoGS is used as a proxy to reorder goods to this end. Such reordering will likely occur before the goods are sold as production and/or shipment of these goods can create an inventory order lead time.
At this point it is important to emphasise that CoGS is only a proxy for stock reordering; there not a perfect correlation between CoGS and inventory. The inter-relationship between CoGS and inventory as presented is a simplification with the following ignored:
- Inventory valuation method
- Gross margin expansion / compression due to say foreign exchange – CoGS being the inverse of gross margin
- Slow moving or obsolete inventory
We demonstrate the CoGS / inventory relationship with two examples. The basic example (Calcs_Basic) illustrates the foundation calculations linking stock reordering, CoGS and ultimately inventory held for sale. It demonstrates the stock cycle from prepayment, through production or work in progress (WiP), into shipment of completed product or stock in transit (SiT) and finally transitioning to inventory. ‘Just in Time’ inventory management is assumed.
The advanced example (Calcs_Adv) draws on the basic example adding:
( i ) complexity of opening balances for prepayments, WiP and SiT;
( ii ) and allowing user to differ creditor period from payments based on physical receipt of goods.