Cost Of Goods is essentially the charge to replace a unit of inventory, including manufacture, shipping, taxes and preparation fees. I also include an estimate of inventory storage per unit.
Calculating Cost Of Goods is essential in working out if you are profitable or not. It's quite easy to overlook some fees and charges, to be less profitable or even losing money on a sale without realising it.
From an accounting perspective, inventory is considered an asset, when you sell a unit of inventory the Cost Of Goods per unit is then charged against the asset account. Cost Of Goods becomes the expense against the income from the sale.
According to Generally Acceptable Accounting Principles, you need to maintain the Cost Of Goods against the units that are being sold. If the manufacture and delivery costs change, it is not acceptable to take an average Cost Of Goods. To accommodate a change of Cost Of Goods, we provide an effective date for that change.