when a company sells products in a perpetual inventory system the expense account increases and grows the cost of goods sold cogs cogs represents production costs and expenses during a specific period this includes the materials and labor costs but not distribution or sales expenses the formula for cogs appears below 52
cogs bi p eibi beginning inventoryp purchases for the periodei ending inventorya perpetual inventory system maintains a continuous tally of transactions making the cogs available at any time by contrast a periodic inventory system calculates the cogs only after conducting a physical inventory the advantage of a perpetual system in providing a rolling estimate of cogs is clear a company knows after each transaction how much it cost to produce products sold at that point by updating these data on a continuous basis and integrating them with other business systems the company has actionable information available on a 24 7 basis as a way to respond to increased costs in a timely manner gross profit is the result of subtracting cogs from revenue recall that cogs includes the cost of labor and materials but not sales or distribution costs the formula for gross profit is gross profit revenue cogsthe ability to estimate cogs continuously also provides a company using a perpetual inventory system the ability to estimate gross profit continuously that s because every transaction is recorded in real time under a perpetual inventory system 25examples of inventory costing systemscompanies can choose among several methods to account for the cost of inventory held for sale but the total inventory cost expensed is the same using any method the difference between the methods is the timing of when the inventory cost is recognized and the cost of inventory sold is posted to the cost of sales expense account the first in first out fifo method assumes that the oldest units are sold first while the last in first out lifo method records the newest units as those sold first businesses can simplify the inventory costing process by using a weighted average cost or the total inventory cost divided by the number of units in inventory 