How do I track cost of goods sold when my supplier prices change every order?
When supplier prices change from order to order, you need a consistent inventory costing method so your cost of goods sold reflects reality rather than guesswork. Without one, your profit margins become unreliable and you lose the ability to make smart pricing decisions.
The two most common methods for handling this are weighted average cost and FIFO (First In, First Out). With weighted average, you recalculate your per-unit cost after every purchase by dividing total inventory value by total units on hand. Say you had 100 units worth $500 and then bought 50 more at $6 each. Your new average cost would be ($500 + $300) / 150 units = $5.33 per unit. This smooths out price swings so your COGS doesn’t jump around dramatically from week to week. It works well when your products are interchangeable and you don’t need to track individual batches.
FIFO assumes you sell your oldest inventory first. When prices are rising, FIFO results in lower COGS because you’re “selling” the cheaper older units first, which means higher reported profit. When prices drop, the opposite happens. For most product-based businesses, FIFO tends to match the actual physical flow of goods, which is why it’s the more widely used method.
If you’re using QuickBooks Online with inventory accounting enabled, QBO calculates FIFO automatically. Every time you record a purchase at a new price, the system tracks which units came in at which cost and assigns COGS accordingly when you record a sale. You don’t have to do the math yourself. Just make sure you’re entering each bill or expense with the correct unit cost at the time of purchase. Garbage in, garbage out applies here more than anywhere.
For businesses not using QBO’s built-in inventory features, or those that prefer weighted average, a simple spreadsheet works. Update it every time you receive a shipment by recalculating your average unit cost, then use that number when recording sales. It takes discipline but it’s not complicated.
Whichever method you choose, stick with it. The IRS expects consistency in your costing method from year to year. Switching methods requires justification and sometimes IRS approval. Pick the approach that fits your business and apply it uniformly across all products.
Beyond the accounting mechanics, pay attention to what your price fluctuations are actually telling you. If your material costs have climbed 15% over six months but your selling prices haven’t changed, your margins are eroding in a way that might not feel obvious day to day. Clean inventory records make that trend visible on your financial statements. Messy records hide it until profitability is already gone.
If tracking inventory feels overwhelming on top of running your business, a small business bookkeeper who understands product-based businesses can set up your system correctly from the start and keep your COGS accurate month to month. The goal is financial statements you can actually trust when making purchasing and pricing decisions.
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