Glossary · Finance
What is Cost of Goods Sold (COGS)?
Definition
Cost of goods sold (COGS) is the direct cost of making or buying the products you sold during a period, including materials, direct labor, and inbound freight.
COGS = beginning inventory + purchases during the period − ending inventory
Why it matters
COGS only covers costs tied directly to the items sold. Rent for your office or your marketing bill is overhead, not COGS. Getting this split right makes your gross margin accurate.
A candle maker sells 200 candles in a month. Wax, wicks, jars, fragrance, and labels cost $6.50 per candle, so COGS is $1,300. Shipping boxes add $0.80 each, bringing COGS to $1,460. If revenue is $4,800, gross profit is $3,340.
Service businesses often have a version of COGS too, such as paying a subcontractor to deliver a client project. Rules on how to account for inventory can vary, so confirm the method with your accountant.
Common mistakes
- !Forgetting to include shipping-in and packaging, which makes margins look better than they are.
- !Putting overhead such as software subscriptions into COGS, muddying the numbers.
Frequently asked questions
What is Cost of Goods Sold (COGS)?
Cost of goods sold (COGS) is the direct cost of making or buying the products you sold during a period, including materials, direct labor, and inbound freight.
How do you calculate COGS?
COGS = beginning inventory + purchases during the period − ending inventory
What mistakes do beginners make with COGS?
Forgetting to include shipping-in and packaging, which makes margins look better than they are. Putting overhead such as software subscriptions into COGS, muddying the numbers.
Related terms