The cost of inventory is one of the most important considerations of any business trying to make a profit. This is because rising costs have a direct impact on profitability. In order to calculate the cost of inventory you must determine the beginning and ending value of inventory along with the value of purchased inventory over a given time period.

Step 1.

Determine the time period. Let's say you want to determine the cost of inventory over a 1 month time period.

Step 2.

Determine beginning inventory. This is the value of inventory at the beginning of the month (or time period). Let's say beginning inventory is valued at $30,000.

Step 3.

Add up the cost of inventory purchases over the last month (or period of time that is being evaluated). Let's say you purchased $10,000 in inventory over the last month.

Step 4.

Take a physical count of the cost of the inventory at the end of the period. This is the value of inventory at the end of the month in our example. Let's say the value of inventory at the end of the month is $5,000.

Step 5.

Calculate the cost of inventory with the formula: The Cost of Inventory = Beginning Inventory + Inventory Purchases - Ending Inventory. The calculation is: $30,000 + $10,000 - $5,000 = $35,000.