What's the easiest way to calculate inventory cost and markup?

1 Inventory cost

Inventory cost is the amount of money spent on acquiring, storing, and handling inventory. This includes the purchase price of the products, plus any freight, taxes, duties, insurance, storage, and handling fees. The method used to value inventory, such as FIFO, LIFO, or weighted average, will affect how costs are assigned to the units sold and kept in stock. To calculate inventory cost, you must track the number of units purchased and their cost per unit, the number of units sold and their cost per unit, the number of units in stock and their cost per unit, and total inventory-related expenses. Depending on the inventory costing method used, one of the following formulas can be used: FIFO: Inventory cost = (Units in stock x Cost per unit of the oldest batch) + (Units sold x Cost per unit of the batch sold), LIFO: Inventory cost = (Units in stock x Cost per unit of the newest batch) + (Units sold x Cost per unit of the batch sold), or Weighted average: Inventory cost = (Units in stock x Average cost per unit) + (Units sold x Average cost per unit).

2 Inventory markup

Inventory markup is the percentage by which you increase the inventory cost to determine the selling price of your products, representing your gross profit margin. It can be influenced by factors such as target market, competitors, demand, and expenses. To calculate inventory markup, you need to know the inventory cost per unit and the selling price per unit. The formula for inventory markup is (Selling price - Inventory cost) / Inventory cost x 100%. Alternatively, you can calculate the selling price using this formula: Inventory cost x (1 + Inventory markup / 100%).

3 How to use inventory cost and markup

Knowing how to calculate inventory cost and markup can help you improve your inventory management in several ways. For instance, you can compare your inventory cost and markup with industry benchmarks and competitors to assess your performance. Additionally, it is possible to adjust your inventory cost and markup based on market conditions, customer preferences, and sales trends to optimize your pricing strategy and profit margin. Moreover, monitoring your inventory cost and markup over time can reveal any changes or anomalies that may indicate inventory issues. Furthermore, analyzing your inventory cost and markup by product category, location, or channel can help you determine which segments are more profitable and which ones need more attention. Finally, you can use your inventory cost and markup to forecast your cash flow, budget, and income statement.

4 Tips and best practices

To ensure accurate and easy inventory cost and markup calculations, an inventory management software or system should be used to automate the calculations and update them in real time. The inventory costing method should be selected based on the business model, industry, and accounting standards. Regular reviews of inventory cost and markup should be conducted and adjusted as needed. Additionally, expenses related to inventory should be tracked and allocated properly. It is important to avoid excessive inventory markup that could deter customers or devalue your value proposition.

5 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?